| | DECEMBER 20169Consultants ReviewWhile the stressed assets crisis should not have come as a surprise to the industry watchdogs, the sheer size and consistency of defaults caught the lenders and owners unprepared.Management of Bad LoansFrom the lenders' point of view, bad loan scan be recovered, sold, restructured or settled.There are several recovery options, most common of which are enforcement of security and sale to Asset Reconstruction Companies (ARCs), and recovery from Debt Recovery Tribunal (DRT) and Lok Adalat. The recovery rate, however, has remained tepid at about 26 percent. The size of bank loans is unsustainable at current levels of operations; therefore, distressed sale and revival of the borrowing company are the more preferred options for lenders, especially in case of large exposures. Banks can either take control of the business to turn it around or sell the bad loans to ARCs and focus on its core operations. However, ARCs are still not a preferred resolution framework because of market challenges such as valuation expectations between ARCs and seller banks, inter-creditor consensus and the absence of a secondary market for SRs.Restructuring of Loans also has Multiple Manifestations.· The Corporate Debt Restructuring (CDR) mechanism was introduced in 2001 for restructuring of the corporate debts of viable entities facing problems, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned. However, CDR cell has witnessed more failed exits than successful ones. · RBI has regularly introduced newer schemes to strengthen debt resolution. · The Joint lender forum (JLF) mechanism was introduced in April 2014 to facilitate the recognition of early warning and resolutions by mandating the formation of a JLF once the account is reported as SMA-2 and the proposal of a corrective action plan. · The 5/25 scheme was introduced in July 2014 to address the mismatch between the long gestation periods of projects in infrastructure and core industries sectors and the repayment tenure of loans. · Under the Strategic Debt Restructuring scheme introduced in June 2015, lenders can acquire control of distressed companies and initiate a turnaround. It has so far not met the desired success mainly due to mismatch of valuation expectations. · The Scheme for Sustainable Structuring of Stressed Assets (S4A), introduced in June 2016, allows promoters to remain in control if more than 50 percent of their debt is "sustainable," and the unsustainable portion is converted into an equity or quasi-equity instrument.The other popular debt-management strategies used by corporates as stand alone strategies or as part of the overall restructuring package include the sale of non-core assets, structured funding, externalization of domestic debt, debt transfer to subsidiaries, implementation of a turnaround plan, issuance of bonds, and capitalization of interest pay-outs on loans against projects.In order to arrest value erosion during the ongoing debt crisis, there is an urgent need to re-channelize debt into productive areas. The success of all efforts in crossing this low tide of debt cycle hinges on collaboration between lenders, promoters and regulators. Lenders may have to take "hair cuts", promoters may have to let go of their controlling stake, and the investor community would have to rise up to the challenge to bring back to health the bleeding industries. The Government, it seems, is committed to make the necessary policy changes to protect economic interests of the country. The easy availability of bank credit, coupled with a robust equity market, has been powering the engine of economic growth for well over the past 25 years
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