Restructuring of loan
- May 28, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Restructuring of loan
Section: Monetary Policy
With the unwinding of support measures, some of the restructured accounts might face solvency concerns, with the impact on banks’ balance sheets becoming clearer in the upcoming quarters, said the Reserve Bank of India’s latest annual report.
The RBI noted that the setting up of the National Asset Reconstruction Company Ltd.
(NARCL) is a step forward for resolution of large value legacy stressed assets,
Restructuring of loans:
When a borrower is facing financial stress, the banks can modify the terms of the loan by a practice called restructuring/ recasting. This is done to prevent the borrower being declared a defaulter and the loan being classified as an NPA (non-performing asset).
Loans can be restructured by changing various parameters like:
- Repayment period
- Repayable amount
- Number of instalments
- Interest rate
- Additional loans
- Corporate Debt Restructuring (CDR)-The CDR system is the RBI’s first loan recast mechanism.
- It was framed in the early 2000s to recast corporate debts outside the purview of the Board for Industrial and Financial Reconstruction (BIFR) and the Debt Recovery Tribunals (DRT).
- It has a 3 tiered structure consisting of:
- CDR Standing Forum– which is responsible for establishing policies and guidelines related to debt restructuring.
- CDR Cell– for scrutinizing the recasting proposals from borrowers and banks. This was overseen by the erstwhile IDBI.
- CDR Empowered Group– which takes the final decision on whether or not to approve the restructuring proposal.
- Strategic Debt Restructuring Scheme (SDR):
- This is an improved version of the CDR introduced by the RBI.
- Under this scheme, the banks could convert the loan amount into 51% of equity. Once the firm becomes viable, this equity could then be sold to the highest bidder.
- Sustainable Structuring of Stressed Assets (S4A) scheme-This is a restructuring scheme introduced, in 2015, for projects that are already up and running and has an exposure of 500 crore INR or more.
In 2018, the RBI scrapped numerous loan recasting schemes like CDR, S4A, SDR, Flexible Structuring of Existing Long Term Project Loans scheme and the Joint Lenders Forums scheme. It made Insolvency and Bankruptcy Code the main tool to deal with defaulters.
National Asset Reconstruction Company Limited (NARCL)
NARCL has been incorporated under the Companies Act and has applied to Reserve Bank of India for license as an Asset Reconstruction Company (ARC).
NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution. PSBs will maintain 51% ownership in NARCL.
NARCL will acquire fully provisioned stressed assets by making an offer to the lead bank in a consortium of lenders; once the offer is accepted, NARCL will engage with India Debt Resolution Company Ltd. (IDRCL) for management and resolution of the stressed assets.
IDRCL is a service company/operational entity which will manage the asset and engage market professionals and turnaround experts. Public Sector Banks (PSBs) and Public FIs will hold a maximum of 49% stake and the rest will be with private sector lenders.
NARCL will acquire stressed assets worth about Rs 2 lakh crore from various commercial banks in different phases.
- The NARCL will first purchase bad loans from banks.
- It will pay 15% of the agreed price in cash and the remaining 85% will be in the form of “Security Receipts”.
- When the assets are sold, with the help of IDRCL, the commercial banks will be paid back the rest.
- If the bad bank is unable to sell the bad loan, or has to sell it at a loss, then the government guarantee will be invoked.
|Security receipts are defined under section 2(1) (zg) of SARFAESI Act.
It means a receipt or other security, issued by an asset reconstruction company to any qualified buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder, thereof, of an undivided right, title or interest in the financial asset involved in securitization.