Reserve Bank gives lenders more leeway to handle stressed assets

LENDERS will soon get more headroom to deal with emerging stress — loans that aren’t non-performing assets (NPAs) yet but could turn toxic at some point. They will be allowed to rejig capital structures of such companies by converting a portion of the debt into convertible redeemable preference shares (CRPS). The objective is to enhance the capital structure of the companies.

However, banks will need to make an upfront provision of at least 20% for the entire exposure — although these can be called standard assets. Moreover, the ensuing hit to the net present value of the exposure must be amortised over four quarters. An oversight committee chaired by a high court judge will be set up and the rules will be announced by the central bank sometime next week. The committee will only bless the process; the specific decisions on the capital reformulation will be taken by the banks.

The CRPS can either be converted into equity shares or redeemed.

Although aimed at improving the balance sheets of companies which are currently standard assets on the books of banks, the route can also be used for NPAs. Banks need to provide at least 15% for NPAs.

The flexibility being given to banks is to help them deal with what are called SMA-1 and SMA-2 accounts. SMA-1 accounts are those where repayments are overdue between 30 and 60 days while SMA-2 accounts are those where repayments are overdue between 60 and 90 days. This mechanism is aimed at assisting entities with large debt on their books but inadequate cash flows to service the loans.

While these are standard assets, they could benefit from more equity, which would enhance the capital structure. The equity of the promoter will fall but the balance sheet will become stronger.

Total troubled loans of Rs 6,24,119 crore at the end of December 2015 were 9% higher than the Rs 5,73,381 crore seen at the end of June 2015. While Rs 3,06,180 crore worth of loans were classified in the SMA-1 category, another Rs 3,17,939 crore was in the SMA2 category.

These special mention accounts follow a fiat from the Reserve Bank of India in 2014 asking banks to put in place a mechanism to red-flag troubled loan accounts early in the day so that these could be dealt with speedily. If the loan is not serviced after 90 days, it must be classified as an NPA.

The central bank had also directed banks to provide credit information regarding their exposures above Rs 5 crore to the Central Repository of Information on Large Credits. As soon as an account is classified under SMA-2, banks have to form a committee called joint lenders’ forum (JLF) to evaluate the asset and work towards early resolution of stress in the account.

On a rough reckoning, troubled loans at 27 public sector banks stood at Rs 2.67 lakh crore. While State Bank of India's SMA-2 accounts stood at Rs 60,228 crore, or 5.17% of its total advances, at Punjab National Bank the exposure is approximately 6.31% of its total loan book or Rs 24,824 crore. Between them, 21 private sector banks have Rs 49,689 crore of troubled exposure. ICICI Bank tops the list with Rs 10,897 crore worth of SMA-2 loans, followed by Yes Bank with Rs 7,066 crore.