SDR (strategic debt restructuring), the new kid, or to say so, whiz-kid to solve NPA problems, improve assets quality of banks and put productive assets in the right hand. The SDR scheme bought ray of hope for stakeholders (like employees, suppliers, customers, government agencies) of a heavily debt-laden companies as well as chance to reduce ever increasing NPA’s of the banking industry and other financial institutions.
The first premise is that banks, particularly public sector banks
- have the bandwidth to understand business dynamics of its various customers operating in different industries,
- are able to assess the possibility of a turnaround
- have internal professional skills to identify an interested strategic partner for such loss making company within 18 months and
- finally transfer the business to such partner at a valuation where the bank is able to recover the reasonable percentage of its outstanding debt ,obviously which has to be more than amount it would have otherwise recovered through any other option .
If any of the above is missing, then it will result in substantial additional loss to banks and financial institutions and result into bailout scheme for owners /promoters and hence defeat the basic objective.
Financial snapshot of few companies which are proposed to be taken over under SDR:-
SDR is one of the RBI’s most aggressive steps to rein in wilful defaulters and curb rising bad loans. NPA problem for all the banking channels especially in nationalize banks are relentlessly increasing which is impacting their margins adversely. Indradhanush & SDR scheme will likely to pave the way for the sector to compete aggressively with private sector banking.
SOME KEY ISSUES:-
- Many accounts run into problems, not because of inefficient managements but due to other problems like weak demand, cheap imports, overcapacity etc. In such cases, effecting a management change is not likely to substantially improve the troubled company’s performance.
- To sell their stake, Banks has to find new promoter within 18 months. Chances of turning around a financially- distressed company in 18 months are quite bleak.
- To classify their lending as “Standard” banks may sell the company in a hurry to new promoters without proper due diligence which may further deteriorate company’s condition.
- Getting required authorisation from existing shareholders & creditors is expected to be time-consuming process. This may prove to be a major bottleneck in the lenders plan to operationalise the SDR scheme.
- The ability of banks to find new buyers will be critical in some companies where the condition of the company is worst.
- The new promoters may be unwilling to accept the existing terms on the debt.
- Unions might protest the change in management as it may affect their pension or bonuses.
So what I believe is key to the success of SDR scheme is to create a shell within each bank consisting of professionals experts in financial structuring, M & A, technical expertise and also industry domain. For smaller banks, it may be necessary to take help of expert professional firms having required skill sets