Norms for loan recast under S4A relaxed

MUMBAI: The Reserve Bank of India relaxed provisioning norms for loans restructuring under the socalled S4A scheme, a move that could help the scheme take off many months after it was first announced.

In the much awaited revision to its Scheme for Sustainable Structuring of Stressed Assets popularly known as S4A, the Reserve Bank of India allowed banks to consider the sustainable portion of debt as a standard loan, provided they set aside funds for the unsustainable part of the debt upfront.

''These are slightly easier regulations because banks have now been given 180 days to figure out a resolution. Also provisions can be reversed if the resolution is successful within one year,“ said RK Bansal, CFO, IDBI Bank The Reserve Bank of India in June had called for splitting the loan of a stressed entity into two parts -sustainable and unsustain.While part A will be the sustainable portion on which the borrower can pay interest basex on his cash flows, the remaining amount on which the borrower can't pay the interest will get converted into equity redeemable cumulative optionally convertible preference shares.

According to the revised guidelines while Part B of the loan will continue to be non-performing, Part A of the loan may be treated as standard subject to lenders provisioning upfront for more than 50% of the Part B debt or 25% of the aggregate outstanding debt.

“The sustainable portion (Part A) may optionally be treated as `Standard' upon implementation of the resolution plan by all banks,“ the RBI notification said.

“... Subject to provisions made up front by the lenders beigher of 50 per ing at least higher of 50 percent of the amount held in part B or 25 percent of the aggregate outstanding (sum of Part A and part B).“

The RBI has also said that lenders may upgrade Part B to standard category and reverse the associated enhanced provisions after one year of satisfactory performance of Part A loans. RBI had not provided for claw back of provisions in its earlier guidelines.