How RBI Empowers Lending Banks?

How RBI Empowers Lending Banks?

Question: Efficient banking is the sum total of effective policy implementation. RBI has empowered lending banks to undertake “a strategic debt restructuring" (SDR) by converting loan dues into equity shares. Discuss.

• The apex bank has empowered lending banks to consider change in ownership of borrowing firms which have gone through the process of debt restructuring

• In many cases of restructuring of accounts, borrower firms suffer due to operational and managerial inefficiencies despite considerable sacrifice made by lending banks

• Change of ownership will be a preferred option in such cases

• The RBI has also said the JLF should consider change in ownership under framework for rejuvenating distressed accounts within the economy

• In many cases of accounts restructuring, borrower companies have not been able to attain stress free states despite considerable sacrifices made by lending banks

• In such cases, change of ownership is the preferred option and Joint Lenders Forum should consider this

• JLF must incorporate the option to convert an entire loan or part thereof into shares in the company in case the borrower has not been able to achieve viability milestones or stay within critical conditions stipulated in the restructuring package

• Support for the same should be through necessary approvals including special resolution by shareholder from borrowing firm to enable lenders to exercise this option

• RBI has indicated that banks can recast firm’s debt under SDR/Strategic Debt Restructuring scheme holding 51 percent or more of the equity after the debt for share conversion

• SDR scheme provides more flexibility for lenders to recover bad loans

• Other measures include converting debt to equity within 30 days of the review of the company’s account

• Lenders who acquire shares of the listed firm under restructuring will be exempt from making open offer as per rules from SEBI

• Restructuring norms will also apply to accounts prior to the notification with the aim of ensuring more stakes of promoters for reviving stressed accounts and providing banks with enhanced capabilities to initiate change of ownership in accounts which are no longer viable.

In such cases, loan dues can be converted to equity shares

• RBI also empowered lending banks to incorporate clause at time of debt revamping itself to convert loans to equity if the borrower fails to adhere to set visibility milestones

• JLF should approve debt conversion package within 90 days from date of deciding to undertake the SDR

• Equity shares that are acquired by banks under SDR scheme must be exempt from requirement of periodic mark to market prudential norms for allocated period

• A decision on invocation of SDR has to be taken within 30 days from the review of the account concerned

• JLF should approve debt conversion package within 90 days from decision to undertake the SDR

Facts and Stats

• Equity holding through debt conversion should not be treated as investment in associate as per the new norms

• Through the SDR scheme, RBI has laid out terms for identifying new promoters

• ‘New promoter’ cannot be a person/entity/subsidiary/associate (domestic and overseas) from the existing promoter/promoter group

• It should be clarified that acquirer does not come under existing promoter group, RBI declared