The Reserve Bank of India’s (RBI) new Strategic Debt Restructuring Scheme (SDRS) announced on Monday will not be a game-changer when it comes to debt recovery, according to banking experts.
The scheme, which allows banks to convert their outstanding loans into equity in a company if even restructuring has not helped, will serve as a deterrent to big companies and wilful defaulters, according to the RBI.
This sentiment is echoed by HDFC Bank Managing Director Aditya Puri, who said that the recently-announced SDRS was an excellent move. “They (corporates) must fear that they will lose the company if they mismanage funds,” he said.
However, other banking officials felt that SDRS would be a tool that would likely not be used often due to the legal and procedural complications.
While the RBI has made clear that such a scheme is meant to be used when a company’s turnaround is being held up by the inefficiency or failure of the existing management, there is a concern in many quarters over what the bank will do once it owns a majority share.
“Who will run the company for the bank? The bank itself does not have the wherewithal to run a company,” said Sanjay Bhattacharya, former Managing Director and Chief Credit and Risk Officer of State Bank of India.
“The RBI notification does state that banks have to comply with the Banking Regulation Act, specifically Section 6, which stipulates the forms of businesses that banking companies can engage in. However, even looking for alternative management is a time-consuming process, while the company continues to flounder,” according to Mr. Bhattacharya.
The notification also urges banks to sell their equity in these companies as soon as possible.
“This opens up all kinds of other issues,” according to Mr. Bhattacharya. “Banks will find it difficult to find buyers. Nobody will want stake in a floundering company,” he said.
Published - June 10, 2015 11:29 pm IST