Strategic Debt Restructuring(SDR) Scheme of RBI vs Debt Restructuring
What is Debt Restructuring
It is a process that allows companies to reduce debt and extend terms of payment. It can be a private or a public company facing financial distress or having issues with cash flows. It is less expensive than bankruptcy. Alterations are made in terms and conditions or the burden is reduced by increasing the time given to pay back the obligation and decreasing the interest paid.
All you need to Know about Strategic Debt Restructuring (SDR)
It is a new tool by RBI announced on 8th June 2015. It is initiated with the idea to reduce the burden of stressed assets on banks. It is based on guidelines of Joint lenders Forum. Recently there has been a substantial increase in NPAs. In order to protect banks from this at times when economy is low, Strategic Debt Restructuring (SDR) can be helpful step. Besides banks, it is also helpful for stressed companies. It is based on guidelines of Joint lenders Forum. This scheme aims to increase stake of promoters for revival of stressed companies by attracting potential buyers. Company is handed over to a new promoter who can turn it around which indeed is a difficult task. The Scheme is applicable following to CDR or any other restructuring application undertaken by the company. CDR stands for corporate debt restructuring and its first guidelines were issued in 2001 and it was developed by RBI.
Strategic Debt Restructuring(SDR) vs. corporate debt restructuring
CDR covers all categories of assets in the books of creditors classified in terms of RBI’s prudential asset classification standards whereas SDR covers assets which have been restructured by CDR or any other restructuring exercise undertaken by the companies. Unlike SDR providing lenders opportunity to convert debt into equity CDR restructures the existing debt by increasing period of repayment or decreasing the rate of interest. CDR has a three tier structure which includes CDR Cell, Empowered Group and a Standing Forum. The final decision on restructuring is taken by Standing Forum whereas in SDR a Joint Lenders’ Forum is formed by lenders to decide as per the Scheme on the conversion of debt into equity.
Effects on following
In order to attract potential buyers to a stressed company, banks will have to sell the equity cheap and bring the debt-equity ratio to a sustainable level. The banks will recover only a part of the loan only if the company is turned around by the new promoter. SDR will help banks facing the problem of loan defaults, if companies have incomplete projects or do not perform well. Conversion of debt into equity in an enterprise by a bank may result in the bank holding more than 20% of voting power, which will normally result in an investor associate relationship under applicable accounting standards.
Real Estate and Construction Sector
Companies facing cash crunch but having properties at good locations can resort to strategic debt restructuring offered by banks standstill benefit. Builders having unfinished projects and needing more money can benefit through this scheme as it will not only help them finish the project but will also avoid unnecessary costs and generate revenue.
Until the companies turn around, lenders will find it difficult to run these businesses. But it will be beneficial to lenders as they will get to recover a part of money lost.
Issues related to Strategic Debt Restructuring (SDR) scheme
Bankers may be exposed to litigation as SDR scheme majorly depends on will of lenders. Cases can be filed against banks by groups like rival companies, promoters etc. raising a concern for lenders. It will be difficult for the bank to decide between comparable new owners. Numerous accounts run into problems not because of incompetent managements but due to structural glitches like weak demand, cheap imports, over capacity etc. Earlier new promoters had to be found within 18 months of acquiring the company. However, in Feb 2016, the SDR norms has eased and the lenders are now allowed to divest 26% within 18 months and also has an option to exit their remaining holdings gradually, with upside as the company turns around. If banks are not able to find promoters it would cease all the relaxations and lenders will have to treat these as non-performing assets.
A lot of loans are defaulting in the current scenario. Therefore bankers will have a lot of opportunities to use Strategic Debt Restructuring. It will be beneficial to banks, realty and construction sector but they will also have to face some difficulties. The CDR mechanism has since start till 30th Sept. 2015 approved 530 cases for restructuring out of which 189 cases have failed and 257 cases are at various stages of implementation. Only 87 cases have been effectively implemented. In view of the substandard performance of CDR mechanism, SDR scheme seems a right step by RBI to put pressure on defaulting borrowers. However, it needs to be seen whether SDR scheme will be able to make willful defaulters repay the loans or risk losing the ownership of their companies.