Is Strategic Restructuring Of Debt The Answer For Banks?

To reduce the stress on banks due to non-performing assets (NPAs), troubled accounts and burgeoning restructurings, the Reserve Bank of India (RBI) has introduced measures over the past 18 months. These include the framework for early detection of potentially stressed accounts before these turn into NPAs, the guidelines on constituting the joint lenders forum (JLF) and the mechanism for putting in place a "corrective action plan" (CAP) for stressed borrowers, and amendments to the guidelines on wilful defaulters.

The JLF-CAP framework encourages lenders to: (a) explore a transfer of equity from promoters to lenders to compensate lenders for their "sacrifice" (i.e. haircut); (b) ensure that promoters infuse more equity into the borrower; and (c) see that the promoters' shareholding is transferred to a security trustee or an escrow agent until the borrower is "turned around".