Banking - RBI‘s Modifications: Ameliorating Move; Sector Update ::Edelweiss

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Taking cognizance of the feedback received from various stakeholders on the roadblocks/mis-implementation of the earlier directive, the RBI has modified its guidelines to revitalise stressed assets (viz. strategic debt restructuring (SDR), flexible structuring of long-term projects (5/25), joint lender formation (JLF), among others). The main focus is on SDR, wherein the RBI has asked banks to beef up provisions (while allowing them to maintain asset classification), which was broadly anticipated by market and has been factored in our estimates. Further, the RBI has allowed banks to avail asset classification benefits, even if they are able to sell 26% stake within 18 months (versus 51% stake earlier) allowing them to capture upside as the company turns around and providing them the option to exit their remaining stake gradually. Other modifications are technical in nature (refer pg 2) to strengthen existing framework. While we expect some failure in SDR cases (we have assumed 50% default in our numbers and have built in accelerated provisions), but allowance of lower stake and implementation of guidelines on prospective basis will be incrementally positive.

RBI tweaks stressed asset revitalization framework

The RBI has made modifications to its stressed asset revitalization guidelines, particularly on: 1) SDR; 2) JLF; 3) restructuring; 4) flexible structuring of project loans (5:25); and 5) sale to ARCs. SDR is the main focus area, while other modifications are technical in nature to strengthened existing conditions.

• The apex bank has allowed banks to avail asset classification benefits, even if they are able to sell 26% stake after 18 months (versus 51% stake earlier). This will potentially have 2 benefits: a) it will become easier for banks to find buyers; and b) allow them to capture upside as the company turns around.
• Taking cognizance of fact that banks may not be able to sell stake or may have to recognise loss on sale of equity (mark-to-market - MTM) leading to the possibility of having cliff provisioning at the end of 18 months, the RBI has asked banks to: a) periodically value securities that can be amortised over 4 quarters; and b) hold provision of at least 15% of residual loan (made in equal installments over 4 quarters; refer table 1 for case study). We do not expect this to have any material impact on our numbers, as we have already factored in the same (50% default probability and 60% loss given default on SDR cases).

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https://www.edelweiss.in/research/Banking--RBI%E2%80%98s-Modifications-Ameliorating-Move;-Sector-Update/31690.html