Indian Banks are witnessing rising NPAs due to the slowdown in the Indian economy and high interest costs. The Reserve Bank of India has introduced various measures for controlling NPAs in the Bank including Asset Reconstruction Companies, SARFESI Act, Joint Lenders Forum (JLF), etc., However, the NPA figure in banks continue to remain high and hence the RBI has recently introduced the Strategic Debt Restructuring Scheme which is aimed at improving the working of banks faced with defaulters. This Scheme is about the terms that banks can write into the loan agreements, which will kick in at the time of default.
The RBI in its "Framework for Revitalizing Distressed Assets in the Economy - Guidelines on Joint Lenders' Forum (JLF) and Corrective Action Plan (CAP)" has suggested change of management as a part of restructuring of stressed assets. With this principle in view and to ensure that the shareholders bear the first loss rather than the debt holders, JLF/Corporate Debt Restructuring Cell (CDR) may consider the following options when a loan is restructured:
A large number of borrowers in India are in a state of default to their lenders, such as banks. Hence, the RBI suggests that Joint Lenders' Forum (JLF) should actively consider a change in ownership and take necessary action.
The conversion can be done at a fair value to be determined according to the RBI Guidelines, but not below the face value.
This SDR scheme has given so many benefits to banks like continuation of existing asset classification of the account for a period of 18 months from the reference date, exemption of acquisition of shares from regulatory ceilings, exemption from investment in para-banking activities and intra group exposure etc. However, it's believed that there is a lack of clarity about its legal foundations. A key problem of the present environment is the presence of multiple frameworks such as DRT, CDR, JLF, etc. This creates forum shopping and increases delays. The bankruptcy process has become drawn out and involves battling it out through many steps. RBI's Scheme' adds one more layer of complexity into a complex system. The Code needs to be a clean and modern replacement for these multiple procedures.