RESEARCH PAPER

Implementation of RBI Directives vis-a-vis Large-Scale

Industries

SUBMITTED BY
Gunjan Rai (2013-79)
IV Year, VIII Semester

SUBMITTED TO
Prof. Vidyullatha Reddy

NALSAR University of Law

 TABLE OF CONTENTS

1. Introduction
2. Large Scale Industries in India
Sugar Industry
Steel Industry
Infrastructure Industry

3. RBI Schemes and Initiatives and their Implementation

5:25 Scheme
Strategic Debt Restructuring (SDR)
Sustainable Structuring of Stressed Assets (S4A)

4. Conclusion
Introduction
Large factories, machinery and government regulation of industrial work are three features
that define a large-scale industry1. Large-scale industries are industries with huge
infrastructure manpower and heavy capital and play an important role in the economic as well
as social development of a country. Large-scale industries are hugely dependant on the
banking and finance institutions of the country. Because the economy of a country relies
equally on these core industries, it is up to the Apex Bank of India to play a key role in
issuing directives to the banking and finance institutions of the country from time-to-time.
In the past few years, large-scale industries have been suffering from growing indebtedness
and huge losses. The Reserve Bank of India (RBI) has unveiled several new schemes and
initiatives to assist these industries, be it loans or debt. This paper examines three of the
major large-scale industries of India: sugar, steel and infrastructure and the common schemes
and initiatives that RBI has invoked to aid them financially. Further, it also examines how
well the schemes and initiative have fared and been implemented.

Large Scale Industries in India

Sugar Industry
The Indian sugar industry is one of the oldest large-scale industries that have existed since
independence. Sugar industries are agro-based industries and affect agriculture
fundamentally. The most remarkable attribute of a sugar industry is the vital relationship
between the factory and its cultivators whose interest and well-being are interdependent. It is
significant in terms of both investment and employment. However there are some ways
where it strays from the established theory of financial management. The management of
working capital becomes less efficient in sugar industries because of huge inventories, lower
turnover, loans and advances and their slow recovery, over dependence on bank finances and
holding large idle cash balances.
In 2007, RBI directed commercial banks to lend an additional Rs 630 crore to the sugar mills.
In addition to district co-operative banks, commercial banks were also directed to lend to
sugar mills in order to help them achieve a higher buffer stock of the commodity. The entire
amount was to be used by sugar mills only towards payment of cane prices to the farmers.

1 Tirthankar Roy, The Economic History of India, 1857-1947, 2011, published by Oxford Scholarship
Online
These steps were taken after taking into consideration the high production of sugar that
resulted in around 125 lakh tonnes of surplus sugar, landing both sugar co-operatives and
mills in a crisis2.
In the past few years, the sugar industry has made cash losses due to surplus sugar
availability, substantial dip in sugar prices and unreasonably high sugarcane prices. The
losses therefore put the viability and future cash flows for sugar industries under pressure,
which would in turn, create hurdles in getting loans.
In 20143, a panel led by Minister Sharad Pawar recommended interest-free loans to bail out
the cash-starved sugar industry. The Cabinet Committee on Economic Affairs (CCEA) later
approved a Rs 6,600 crore package owing to the recommendation. However, the
implementation of the proposal was highly inefficient. In fact, the Department of Financial
Services turned down the mills demand for relaxing some of the rigid eligibility conditions
for banks to start disbursing fresh loans to the industry. According to the Department of
Financial Services, lending was subject to various norms relating to security, future cash
flows for the life of loan (five years), establishing the viability and debt servicing capacity,
conduct of loan including the restructuring guidelines as notified by the RBI for the sugar
industry from time to time. The DFS supported its rejection by quoting the RBI guidelines,
stating that it was up to the lending banks to satisfying themselves of the sugar mills capacity
to service the debt as per their individual bank loans policy. However, if the sugar mills were
stable enough to satisfy the bank policies, they wouldnt have sought help from the
government in the first place, rendering the guidelines useless.
In 2016, it was estimated that sugar mills in Uttar Pradesh, one of the country's largest sugar
producers, had to pay around Rs 14,000 crores to farmers at the start of the 2015-16 sugar
season in October. However, of this, only around 14% was pending as on June, 2016. The
Central governments soft loan and SARFAESI loan amounting to Rs 10,000 crore, that were
disbursed over the last few years helped in easing the dues 4. Sugar mills like Modi Sugars,
2 Bureau, RBI Asks Banks to Lend Buffer Sugar, Economic Times, Published on September 01, 2007
Link: http://www.pressreader.com/india/economic-times/20070901/282432754769551

3
Banikinkar Pattanayak, Sugar Rescue Dead on Arrival, The Financial Express, Published on January
30, 2014
Link: http://www.indiansugar.com/NewsDetails.aspx?nid=3063

4 Sanjeeb Mukherjee, Jump in Sugar Prices, Drop in Output, Business Standard, Published on July
13, 2016
Link:http://www.business-standard.com/article/markets/jump-in-sugar-prices-drop-in-output-pull-out-
most-up-sugar-mills-from-red-116071300383_1.html
Mawana, Rana Sugars and Bajaj Hindustan came under scrutiny for still not having paid their
dues to the farmers.
Steel Industry
India was the worlds third-largest steel producer in 2016. 5 The growth in the Indian steel
sector has been driven by domestic availability of raw materials such as iron ore and cost-
effective labour. Consequently, the steel sector has been a major contributor to Indias
manufacturing output.
The Indian steel industry is very modern with state-of-the-art steel mills. It has always strived
for continuous modernisation and up-gradation of older plants and higher energy efficiency
levels.
In 2015, it was reported that lending to the steel industry by banks was growing at a
compounded annual growth rate of 21 per cent over the past five years and the level of
stressed assets in the sector exceeded 27 per cent. According to the RBI, five out of the top
ten private steel producers were under severe stress due to the delay in the implementation of
projects. As a consequence, RBI revoked forbearance on restructuring, enhanced fraud
monitoring framework and asked banks to set up Joint Lenders Forum to check the growing
bad loans6. However, its been reported that while the JLF has been meeting as before, the
meetings are usually attended by junior officers who do not have the authority to take
important decisions7. Moreover, following the rules put out by the RBI in June 2015, banks
had taken the decision to give restructuring a try for companies such as Jyoti Structures,
Electrosteel Steels and Visa Steel, but the majority of efforts failed to produce a positive
results and banks were unable to convert their debt into equity within 210 days of the
decision, which rendered the SDR void.
Infrastructure Industry

5 IBEF, Official Website

Link: https://www.ibef.org/industry/steel.aspx

6 BS Reporter, Bank Loan to Steel Sector Grew 21% Over the Past 5 Years, Business Standard
Published on August 15, 2015
Link:http://www.business-standard.com/article/finance/bank-loan-to-steel-sector-grew-21-over-past-5-
years-115081001434_1.html

7Shayan Ghosh, Rs 2.3 Lakh Crore NPAs: Banks Scramble for Solutions, Financial Express,
Published on January 20, 2017
http://www.financialexpress.com/industry/banking-finance/rs-2-3-lakh-crore-npas-banks-scramble-for-
solutions-on-agenda-management-changes-at-some-companies/514995/
Infrastructure plays an important role in the economic development of a country and like
every other country, infrastructure development is critical for the growth strategy of India.
The RBIs definition of infrastructure comprises:
a) energy
b) communication
c) transport
d) water and sanitation
e) mining, exploration and refining, and
f) social and commercial infrastructure8
RBI has also regularly updated the definition of infrastructure lending to include more sub-
sectors9. It defines infrastructure lending as a credit facility extended by lenders to a borrower
for exposure in the following infrastructure categories and their sub-sectors: roads, bridges
and ports under Transport, electricity generation and oil pipelines under Energy, water
treatment plants and water supply pipelines under Water and Sanitation, telecommunication
and telecom services under Communication and, educational institutions and hospitals under
Social and Commercial Infrastructure10.
The outstanding bank credit to the infrastructure sector, that clocked at Rs 95 billion in March
2001, increased to Rs 9,853 billion in March 2016, covering the period where loans were
forwarded without requisite due diligence as part of a trend. 11This led to increase in stressed
assets. High level of stressed assets in the infrastructure industry exist mainly because of the
long time taken by infrastructure projects to achieve completion. The timeline for the
completion of the project needs to be estimated realistically. Another factor is that the loan
recovery should be in accordance with the projects revenue, and should not be recovered in a
shorter time frame as it will add to the costs and build stress. Apart from these factors, there

8 Vinita Nair, Vinod Kothari & Co, RBI Further Amends Definition of Infrastructure Sector, Published
on January 6, 2014
Link:http://vinodkothari.com/wp-
content/uploads/2014/01/Update_Infrastructure_Definition_for_ECB_06.01.2014.pdf

9 Reserve Bank of India, Official Website Link:https://www.rbi.org.in/scripts/NotificationUser.aspx?

Id=8591&Mode=0

10 Ibid.

11 Reserve Bank of India, Official Website

Link:https://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1030
are also several force majeure factors like change in policies, clearances etc that add to the
stressed assets.
As per the rating agency India Ratings and Research Pvt. Ltd., the Indian infrastructure
industry is not expected to do well in the FY 2017 due to factors such as lack of finance and
poorly performing assets. The outlook may improve in sub-sectors like renewable energy and
airports, however, road projects based on toll-based revenues and coal-based thermal power
sector, that have the highest loan exposure are likely to perform poorly. Latest data released
by the RBI showed that bank credit that had been steadily sliding over the first eight months
of the current FY17, recorded its sharpest contraction of 6.7% in November, 1612.
There are several factors that make infrastructure assets different from other asset classes
which make it difficult to match investment demand and financing supply. First infrastructure
projects involve a large number of parties to prevent monopoly. This means that there must
be proper distribution of payoffs and risk-sharing to co-ordinate the interests of all parties
involved. Second, infrastructure projects are long-term and therefore there could be delay in
their implementation owing to several variable factors such as change in policies, clearances
etc. Since infrastructure projects contribute to public good, there is restriction of the parties
ability to determine their prices. Third, there is often mismatch in terms of assets and liability.
Due to the long period required by infrastructure projects for completion, the RBI has
allowed extension of time for completion of projects subject to certain conditions without
change in the classification of the loan. Banks are also permitted to issue guarantees
favouring other lending institutions in respect of infrastructure projects, subject to certain
conditions. RBI has allowed banks to raise funds from the market by way of infrastructure
bonds and the assets financed by such funds are exempted from the Priority sector lending
requirements and the funds raised are exempted from reserve requirements. It has also
allowed the debts due to the lenders in case of PPP projects to be considered as secured to the
extent assured by the project authority in terms of the Concession Agreement, subject to
certain conditions.

RBI Schemes and Initiatives and their Implementation

12 Sandeep Singh, Credit Growth Plunges in Key Infrastructure Sectors, Indian Express, Published
on January 12, 2017
Link:http://indianexpress.com/article/business/banking-and-finance/credit-growth-plunges-in-key-infra-
sectors-rbi-data-4470054/
As per RBI reports, in the past few years, all three of the aforementioned large scale
industries have suffered losses and growing indebtedness due to various factors. As a solution
to bailout these industries, three schemes have played a key role, the 5:25 scheme, SDR and
S4A scheme.
Refinancing Scheme - 5:25
In the Notification released on July 15, 2014, RBI responded to concerns of several
commercial banks regarding long term debt financing to projects in infrastructure and core
industries13. An important attribute of these industries is the long gestation period and large
capital investments. Since the banks were unable to provide such long tenor financing owing
to asset-liability mismatch issues, and often restricted their finance to a maximum period of
12 to 15 years, the repayment of the bank loan was squeezed to a shorter period that created
several problems for the borrower and the project. Therefore, the 5:25 scheme is basically
flexible refinancing of long-term infrastructure loans to allow banks the operational
flexibility for better asset liability management and liquidity planning14.
Initially, in February 2014, the RBI allowed refinancing of existing loans with elongation of
the repayment terms but with a minimum of 50% take-out of the existing loans by the new
lenders. This was reduced to 25% later in August, 2014 and then completely abolished in
December, 2014, where the RBI finally allowed banks to fix a fresh loan amortisation
schedule for an existing loan subject to certain conditions. The conditions were:
a) term loans to completed projects exceeding Rs 500 crore and only after the date of
commencement of commercial operations (this was later modified by the RBI to increase
coverage to all sectors to include sectors where banks have at least Rs 250 crore exposure),
b) the loan is standard as on the date of change of loan amortisation schedule,
c) net present value of the loan remains same before and after the change in loan amortisation
schedule, and
d) the viability of the project is re-assessed by the bank and vetted by an independent
evaluation committee15.

13 RBI, Official Website

Link:https://rbi.org.in/scripts/NotificationUser.aspx?Id=9101&Mode=0

14 Ibid.

15 Kaushik Mukherjee & Murtaza Zoomkawala, Why Proving Diversion of Offshore Borrowings May
Not Be Easy, Economic Times, Published on January 13, 2016
Link:http://blogs.economictimes.indiatimes.com/et-commentary/why-proving-diversion-of-offshore-
borrowings-may-not-be-easy/
Refinancing of long term projects under the scheme should not be construed as
restructuring, as clarified by the RBI. The guidelines under the scheme include:
The viability of the projects must be estimated on the basis of various financial
and non-financial factors such as interest coverage ratio, debt coverage ratio etc by the
banks and NBFCs to determine the ability of the project to repay the loan. Diligence
pertaining to the risks associated must be conducted by the banks and NBFCs.
Banks and NBFCs may fix the amortisation schedule across the economic life
of the project.
Tenor of the amortization schedule should not be more than 80% of the
economic life of the PPP infrastructure projects. For non-PPP infrastructure projects,
the charges must be determined in terms of the 80% of the economic life of such
projects. For core industries, the tenor should be 80% of the economic life of the
project as estimated by the Independent Engineer.
The loan facility should be provided to ensure access to capital during the
initial construction period. The period up to the Operation Date must be refinanced
after a medium term of five to seven years corresponding to the amortization
schedule.
Modification of the amortisation schedule is allowed only after the
Completion Date with respect to the loan, if the actual performance of the project
company is different from the assumptions made at the time of financial closure.
If the initial debt facility or the refinanced debt facility becomes a non-
performing asset at any stage, further refinancing will be put on hold and the bank or
the NBFC will be required to recognize the loan facility as an NPA.
Recently the representatives from the ISMA sought relief under the 5:25 scheme, under
which lenders are allowed to fix longer amortization period for loans to projects in the
infrastructure and core industries sector. Since sugar industry alone would not be covered
under the ambit of infrastructure or core industries sector, it was also communicated that
apart from sugar, the industry also generates electricity apart from producing fuel ethanol to
replace a part of ethanol under the governments blending programme. The industry also acts
as a catalyst for overall socio-economic development in rural areas, which is a key attribute
of a core industry to be covered by the scheme16.

16 Banikinkar Pattanayak, Sugar Mills Approach Government For Restructuring of Loans, Financial
Express, Published on March 11, 2016
Link:http://www.financialexpress.com/market/commodities/sugar-mills-approach-govt-for-restructuring-
of-loans/215207/
The steel industry is also covered under the 5:25 scheme which is a scheme for long-term
infrastructure projects, since the total exposure of the bank was above 500 crores. Essar
Steels was one of the companies where lenders agreed to refinance part of its massive Rs
38,000 crore debt. The lenders consortium agreed to refinance Rs 9,000 crore of the steel
makers rupee debt under the 5:25 scheme. Essar Steels loans to HDFC Bank turned into a
non-performing assets and were consequently sold to Edelweiss Asset Reconstruction
Company in March, 201517. Bank of India also declared the account as a bad loan in May as
the company failed to meet the repayment schedule.
The 5:25 scheme came as a relief for a lot of infrastructure companies. However, despite
several companies lining up to benefit from the scheme, the first approvals came ten months
later. Bhushan Steel was one of the companies where the Joint Lenders Forum approved the
plan for refinancing of the loan. Apart from Bhushan Steels, Jaypee Infratech, Adani Power
and Uttam Galva Metallics also received a green light from their lenders.
According to ICRA, the scheme has seen limited success. The viability of a project is key to
the proposal and the parameters to determine the viability are not specific. According to the
Agency, all applications seeking to avail the benefits of the scheme are being examined on a
case-by-case basis18.
Despite the enthusiasm shown by companies, banks have been skeptical about the 5:25
scheme still. Since a quarter of the loans restructured in the past few years turned bad, banks
are cautious about which projects to consider for the refinancing scheme. One of the issues
with the scheme is that it must be ensured that the net present value (the difference between
the present value of cash inflows and outflows) of the loan remains the same before and after
the refinancing, for which banks would have to charge a higher interest rate, which might not
be acceptable to borrowers. Banks are also apprehensive that the scheme could be misused to
mask bad loans. Rating agencies believe that unless the infrastructure projects start
generating healthy cash flows, banks will have to continue the financial engineering
regularly, keeping in mind the fundamental issues of demand, fuel, regulatory approval, etc19.
17 Ritu Singh, Essar Steels Gets Lenders Nod for Refinance, MoneyControl, Published on October
20, 2015, Link:http://www.moneycontrol.com/news/business/cnbc-tv18-comments/essar-steel-gets-
lenders-nod-for-525-refinance-1283839.html

18 Beena Parmar, 5:25 Refinancing Scheme Making Headway At Last, Hindu Business Line,
Published on June 15, 2015
Link:http://www.thehindubusinessline.com/money-and-banking/525-refinancing-scheme-making-
headway-at-last/article7318940.ece

19Amritha Pillay & Vishwanath Nair, Banks Cautious on Refinancing Infrastructure Firms Bad Loans,
LiveMint, Published on May 13, 2015
Strategic Debt Restructuring
Successor of the Corporate Debt Restructuring initiative that was evolved by the RBI in
2001, SDR was initially welcomed by industries. The Strategic Debt Restructuring initiative
or the SDR, allowed creditors to convert debt into equity and take over the management of
defaulting companies20. Under the SDR initiative, banks can convert a part of the debt in a
company to majority equity, taking over operational control 21. A buyer will have to be found
in 18 months, during which the underlying debt would not attract any negative asset
classification. If no buyer could be found within 18 months, the account would be classified
as a non-performing assets and all pending provisions against the asset would be set aside.
Despite the hope kindled by the initiative, reports say that in the 14 months since the
initiative was introduced, banks invoked the provisions of SDR in at least 21 cases, out of
which only 2 had been closed. The various issues that prevent closing include difficulty in
finding buyers, disagreement over valuations and the appointment of merchant bankers
involved in the SDR process22. Even if a bank managed to find a buyer, the prices were
completely unacceptable. Most of the lenders have already started to look past the SDR
initiative and moved on to S4A or other bad loan resolution mechanisms. The unveiling of
S4A did not help either.
Valuation difference was another issue that took away the excitement surrounding SDR. The
infrastructure companies that invoked the SDR suffered from a serious erosion of economic
value over the last two to three years, which directly affected the valuation of the company
which eventually led to a diversion in expectation between the buyers and the banks. In some
cases, like in the case of Jyoti Structures, banks triggered SDR in a hurry and did not convert
the debt into equity, expecting buyers to take the deal23. Ultimately the deal did not happen.

Link:http://www.livemint.com/Industry/TwST7e5LhLMog1MFz1TX9H/Banks-cautious-on-refinancing-
infrastructure-firms-bad-loan.html

20 RBI, Official Website

Link:https://rbi.org.in/Scripts/NotificationUser.aspx?Id=9767

21Ibid.

22 Vishwanath Nair, Has the Strategic Debt Restructuring Experiment Run Aground, LiveMint,
Published on August 20, 2016
Link:http://www.livemint.com/Industry/jlQ90MUEd8nVVEf9O3brDI/Has-the-strategic-debt-
restructuring-experiment-run-aground.html

23Anand Adhikari, RBI One Size Fits All Strategic Debt Restructuring Scheme is Turning Out to be a
Damp Squib, Business Today, Published on January 29, 2017
Several steel industries invoked SDR, including Electrosteel Steels and VISA Steel Ltd.
However, buyers have been found only for two businesses, Lanco Infratech and Gammon
India. Electrosteel Steels was one of the companies whose loans worth Rs 2,507 were
converted into shares at a value of Rs 10 apiece by the lenders, as part of the strategic debt
restructuring scheme of the RBI. The firm took huge debt to fund its under-construction
greenfield integrated steel and ductile iron pipes plant in Jharkhand24. As per the scheme, the
lenders had 18 months from the date the scheme becomes effective to find a buyer for the
company. If the banks failed to usher in a new promoter, the asset would be classified as a
non-performing asset. Electrosteel Steels had reported a net loss of Rs 624 crores in the
financial year 2015 and its interest expenses had doubled to Rs 452 crores. The company
started facing trouble when it failed to draw a project loan of Rs 824 crore because sanction
from one of the banks had expired25. After the period of 18 months, Electrosteel Steels had
already been classified as non-performing assets by the lenders. As of December 2016, it was
speculated that Piramal Enterprises and the Renaissance Group were in talks to jointly
purchase a 51% stake in Electrosteel Steels and if the deal works out, it would make it the
first successful strategic debt restructuring transaction for banks26.
Due to the rising costs and mounting debt, Gammon India, an infrastructure company
approached the CDR Cell in March 2013, however the CDR package did not work for the
company. In November 2015, therefore, it invoked SDR. In the case of Gammon India Ltd., a
total of 16 banks decided to convert a part of their loan into 63.07% equity under the SDR
scheme. However, the bankers were unable to find bankers for the entire Gammon India and
hence, the company was restructured into three parts: power transmission and distribution
(T&D), engineering, procurement and construction (EPC), and the residual business. While
Link:http://www.businesstoday.in/magazine/buzztop/buzztop-feature/rbi-one-size-fits-all-strategic-
debt-restructuring-scheme-is-turning-out-to-be-a-damp-squib/story/243750.html

24 Sunny Verma, Strategic Debt Restructuring Scheme a Solution With its own Problems, Indian
Express, Published on January 26, 2016
Link:http://indianexpress.com/article/business/banking-and-finance/strategic-debt-restructuring-
scheme-a-solution-with-its-own-problems/

25 Shayan Ghosh, Banks Get Rs 2500 Crore Share in Electrosteel, Financial Express, Published On
November 4, 2015
Link:http://www.financialexpress.com/industry/banking-finance/banks-get-rs-2500-cr-share-in-
electrosteel/160907/

26 Shayan Ghosh, First Successful SDR Coming, Financial Express, Published on December 28,
2016
Link:http://www.financialexpress.com/industry/first-successful-sdr-coming-ajay-piramals-piramal-
enterprises-dalmias-renaissance-group-vie-for-electrosteel-steels/488408/
promoters of Ipca Laboratories Ltd. were brought in for Gammon India (T&D) business 27,
OPG Power Ventures took over Lanco Infratech28.
There is also the issue of all bankers unanimously (or a majority) agreeing to the restructuring
of debts. In the case of Essar Steel, lenders with smaller exposures were of the opinion that
there was no point throwing good money after bad and were hence reluctant to restructure
loans. In fact, HDFC Bank sold its Rs 550 crore Essar Steel exposure to an asset
reconstruction company at 40% discount. Banks have complained that its not possible for all
banks in the Joint Lenders Forum to move in step. Many banks are reluctant to take a call
because they dont have a full-time chief executive. The top posts in many banks are vacant
or occupied by individuals that remain in power for a limited period of time and would not
want their decisions questioned later. There are also complaints of arm-twisting by bigger
lenders from smaller lenders to the RBI29. The 18 month window for lenders to find a
promoter is a short time period to carry out due diligence, valuation and acquisition
documentation of the company. It also becomes tricky for banks to manage these companies
after becoming majority owners. Additionally, after becoming the owner of the 51% stake in
the company, and the exit of the lenders as per SDR Rules, the new buyer must make an open
offer for further 25% stake as per SEBI Regulations. If the open offer is fully subscribed, the
buyer will own 76% and as per SEBI rules, it will trigger a delisting. Therefore, banks must
negotiate with SEBI to provide them an exception to make SDR a success.
Possible solutions to the problems being faced by the infrastructure industry are correct
project appraisal, along with a reasonable timeline. Repayment schedule must be properly
drawn up and in accordance with the cash flows and the pricing of loans must provide for
flexible financing that acknowledges the risky nature of the project

S4A Scheme

27 Vishwanath Nair, Promoters of Ipca Labs Said to have Bought Into Gammon Unit, LiveMint,
Published on March 30, 2016
Link:http://www.livemint.com/Companies/7ZyhIpAMZfycEWhp7CpkOJ/Promoters-of-Ipca-Labs-said-
to-have-bought-into-Gammon-unit.html

28 C R Sukumar, Lenders to Gain Control At Lanco Infratech for a 60% Equity Stake, Economic
Times, Published on July 20, 2016
Link:http://economictimes.indiatimes.com/industry/banking/finance/lenders-to-gain-control-at-lanco-
infratech-for-a-60-per-cent-equity-stake/articleshow/53292459.cms

29Manojit Saha, Consensus Eludes Banks on Debt Restructuring, Business Standard, Published on
June 16, 2015 http://www.business-standard.com/article/finance/consensus-eludes-banks-on-debt-
restructuring-115061601197_1.html
The Scheme for Sustainable Structuring of Stressed Assets (S4A) was unveiled by the RBI in
June, 2016 with the aim to strengthen the lenders ability to deal with stressed assets and put
real assets back on track30. The scheme aim to rework the financial structure of big
corporate entities that are facing genuine difficulties.
As per the S4A scheme, the outstanding debt would be bifurcated into sustainable debt and
equity/quasi-equity instruments that were expected to provide upside to the lenders when the
borrowers turns around31. The scheme can be availed of only if the aggregate exposure of all
institutional lenders in the account is more than Rs 500 crores. Part of the debt, therefore, was
to be restructured as sustainable and the rest as unsustainable and there would be a
moratorium on the repayment of the unsustainable part of the debt. To determine the level of
debt that will be deemed sustainable, the assessed free cash flow would be allocated to
servicing each existing debt facility in the order in which its servicing falls due. The balance
debt would be converted into equity/redeemable cumulative optionally convertible preference
shares. The guidelines for S4A were however, modified by the RBI in November, 2016.
Under its latest guidelines, RBI has allowed banks to classify at least half the debt involved
as standard assets. In case a non-performing asset is restructured under S4A norms, the
sustainable part of the debt can be categorized as standard if banks set aside provisions equal
to at least 50% of the debt classified as unsustainable or 20% of aggregate debt, whichever is
higher32. RBI also said that the unsustainable part of the debt in any S4A, regardless of
whether it was categorized as non-performing assets or standard at the time of restructuring,
could be upgraded to standard, if the sustainable part of the debt performed satisfactorily for
one year. An oversight committee was created to look at S4A cases so that a neutral party
could determine whether all the norms have been followed, which would be consisted of
former heads of state investigative agencies.
In the past few months, sugar mills have again approached the RBI and the Finance Ministry
regarding the humongous 266% rise in their debt in the past seven years, due to high state-
fixed cane prices in times of global commodity price crash and demonetization. Soon, the
mills will be liable to pay for the two loan packages offered to them in the year of 2013-14,

30 RBI, Official Website

Link: https://rbi.org.in/scripts/NotificationUser.aspx?Id=10694&Mode=0

31 Ibid.

32Vishwanath Nair, RBI Tweaks S4A Debt Restructuring Norms, LiveMint, Published on November
11, 2016 Link:http://www.livemint.com/Industry/QUj3gUIEdmqbAFHbpeorDJ/RBI-tweaks-S4A-debt-
restructuring-norms.html
and the moratorium on repayment was set to be over for some mills by as early as March. At
the same time, the prices of sugar are still low and the prices of raw materials remain high.
The representatives of the Indian Sugar Mills Association (ISMA) have asked for
restructuring of the industrys debts, creation of a price stabilisation fund, extension of
interest subvention on loans and increase in the price of molasses. In 2014, the government
had extended subvention loans and disbursed soft loans worth Rs 4,600 in the following year.
However, the sugar industry currently, is more worried about their growing indebtedness.
It was proposed that the sugar industrys debt must be restructured as per the RBIs S4A
scheme for sustainable structuring of stressed assets. It was also proposed that the eligibility
condition of exposure of Rs 500 crore should be brought down to Rs 100 crore so that the
sugar industry becomes eligible for the loans33.
Due to the recent trend in sugar prices and the increasing indebtedness of the sugar industry,
the RBI and government must act sensibly. Ministry of Finance must be approached to direct
individual banks regarding the total exposure to sugar industry. After careful analysis, RBI
must then release directives regarding the window banks will have to provide for
restructuring of loans on a case-by-case basis for sugar industries, or additionally, approve
another package. Once the restructuring is approved for sugar industry, either there must be
an increase in the repayment period, conversion of un-serviced portion of interest to either
term loan or equity as per RBI guidelines and provision of working capital term loan34.
Similarly, Visa Steel is another example of lenders invoking strategic restructuring rules to
convert debt into equity. In a Joint Lenders Forum meeting, the lenders of the company
decided to invoke SDR in 2015. However, the banks have been unable to make any headway
in case of Visa Steels.
Last year, it was reported that the steel industry has outstanding loans of around three lakh
crore in various banks, which makes it one of the largest contributors to non-performing
assets in the country. The Ministry assured that efforts were being made by the government as
well as RBI to restructure their loans. With Chinese steel in the market, the prices of steel
globally have gone down and the Indian steel industry has suffered as a consequence.

33 Bureau, Sugar Millers Seek Debt Restructuring, Hindu Business Line, Published on December 30,
2016, Link:http://www.thehindubusinessline.com/economy/agri-business/sugar-millers-seek-debt-
restructuring-price-stabilisation-fund/article9451779.ece

34Grant Thornton, Review of the Financial Health of the Indian Sugar Mills, Published on January
2015
Link:http://gtw3.grantthornton.in/assets/ISEC_Report.pdf
Recently, power, infrastructure and steel companies sought a complete overhaul of the RBI
S4A guidelines as they argued that the scheme failed to estimate the liquidity crisis faced by
projects that were stalled due to lack of last-mile funding and external factors like land
acquisition delays and environment clearances. Taking these arguments into consideration,
had the RBI stated then that banks would be allowed to classify the sustainable part of debts
as standard under the S4A scheme.
Its been reported that measures such as strategic debt restructuring (SDR) and the S4A
scheme havent been very successful, especially in the case of large-scale industries.
A recent discussion paper by the RBI proposed setting up of long-term finance banks,
especially to fund infrastructure industry, with a capital requirement of Rs 1000 crores. The
eligibility criteria of promoters for a Wholesale and Long-term Finance Bank will be the
same as those for an on tap universal banking license,, which implies that large industrial
houses cannot take more than 10% in these banks. These banks will be exempted from
opening branches in rural and semi-urban areas and will not be made to lend to agriculture
and weaker sections of the society. As per the RBI, these banks will focus on lending to the
large core industries since these industries are normally deprived of regular bank credit due to
asset liability mismatch issues because of long gestation repayment period of assets in such
sectors35.

35Joel Rebello, RBI Proposes Long Term Finance Banks for Funding to Infrastructure Core
Industries, Economic Times, Published on April 08, 2017, Link:
http://economictimes.indiatimes.com/news/economy/policy/rbi-proposes-long-term-finance-banks-for-
funding-to-infrastructure-core-industries/articleshow/58077631.cms
Conclusion
The majority of large-scale industries in India are facing large debts that keep rising. RBIs
efforts to tackle the problem have had limited success and the major schemes unveiled in the
past few years, the 5/25, Strategic Debt Restructuring, and the Sustainable Structuring of
Stressed Assets havent had any meaningful impact, as per several reports. Banks have stated
that despite the various schemes, they need more clarity on restructuring guidelines and
assurance that decisions taken by its officials will not be questioned for successful resolution
of stressed assets36. It has been suggested that having an oversight committee for cases
outside SDR will probably help lenders in taking decisions without fear.
However, the fault doesnt lie solely with the Apex Bank but also recent developments in the
country such as demonetization have had a negative impact on the management of bad loans.
Since demonetization, the majority of bank management has been involved in monitoring and
controlling of cash37.

36 Gopika Gopakumar, SBIs Arundhati Bhattacharya Says Clarity Needed on Debt Restructuring
Norms, LiveMint, Published on February 16, 2017
Link:http://www.livemint.com/Industry/3RzsOUY23h1XcViOhoKFAP/SBIs-Arundhati-Bhattacharya-
says-more-clarity-needed-on-deb.html

37 Vishwanath Nair, Bankers Take Stock of NPA cases as Demonetization Slows Bad Loan
Management, LiveMint, Published on December 12, 2016
Link:http://www.livemint.com/Industry/3Kq2Pk2pYcOTWoAnkIjS0O/Bankers-take-stock-of-NPA-cases-
as-demonetisation-slows-bad.html