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Home / IAS Preparation / Strategic Debt Restructuring

Strategic Debt Restructuring (SDR) Scheme - CDR, S4A and Concerns about SDR | UPSC Economy Notes

Last Updated on Jul 04, 2023
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Strategic Debt Restructuring (SDR) offers banks additional leverage in managing loan-defaulted enterprises. Strategic Debt Restructuring Scheme, or SDR from the RBI, enables banks that have issued loans to corporates and entities to convert a part of the total outstanding loan amount and interest into major shareholding equity in the company. The SDR effort might be initiated by a Consortium of Banks or a Joint Lender Forum (JLF) that has made loans to the delinquent firm. The Joint Lender Forum (JLF) comprises all bankers who have made loans to a potentially stressed or stressed borrower.

This article will help you understand the significance and structure of Strategic Debt Restructuring (SDR). Study major topics of the Indian Economy from the perspective of UPSC Exams.

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What is Strategic Debt Restructuring (SDR) Scheme?
  • Corporate Debt Restructuring (CDR) and Strategic Debt Restructuring (SDR) allow banks to convert loans into substantial shareholder equity in a company.
  • Banks can convert loan amounts into 51% of stock under the SDR programme.
  • Only two sales occurred under the SDR programme, which didn't effectively address the bad loan situation.
  • This strategy aims to tackle the problem of Non-Performing Assets (NPA) in the financial system.
  • Banks can opt for this option if the borrower fails to meet milestones or adhere to restructuring constraints.
  • Joint Lender Forums (JLFs) can be formed for Special Mention Account 2 accounts.

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What is Corporate Debt Restructuring (CDR)?
  • The Reserve Bank of India (RBI) phased out the corporate debt restructuring (CDR) plan on April 1, 2015.
  • Corporate debt restructuring was ignored for years, leading to unscrupulous promoters' misuse of debt restructuring programs in collusion with banks.
  • Banks established a separate CDR cell, with IDBI managing the process.
  • Promoters of many large corporations took advantage of the system, diverting funds while seeking loan recasts through the CDR Cell multiple times.
  • These promoters obtained new loans and used favourable loan recasts to maintain their accounts and avoid classification as non-performing assets (NPA). Some of them are currently undergoing bankruptcy proceedings.

Who Initiates Strategic Debt Restructuring (SDR)?
  • The Joint Lenders Forum (JLF) and Corporate Restructuring Cell (CRC) can launch the SDR programme. The JLF should decide whether to utilise the SDR by converting all or a portion of the loan into equity securities.
  • The decision should be accepted and logged by most JLF members (a minimum of 75 per cent of creditors by value and 60 per cent of creditors by number).

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Features of the Strategic Debt Restructuring Scheme
  • The SDR Scheme is intended to allow lenders to collectively acquire a percentage or more of the debtor’s equity shares and terminate the management team/promoter group in the case of recurring defaults.
  • If required phrases are incorporated in the agreement between the banks and the borrower, SDR provisions will apply to the accounts.
  • The SDR is a measure that assures promoters have a bigger stake in reviving troubled accounts and banks have expanded skills to allow management transfers, and it cannot be used for any other purpose.
  • SDR provisions would also apply to the accounts if required stipulations were included in the agreement between the banks and the borrower.
  • To effect the change in ownership, the JLF lenders must collectively become the majority shareholder by converting their dues from the borrower into equity.
  • Following the conversion, all lenders under the JLF must collectively control 51 per cent or more of the company’s equity shares.

Know more about the Fiscal Responsibility & Budget Management (FRBM) Act.

Concerns about Strategic Debt Restructuring Scheme
  • When banks sell their holdings after the 18-month term, firms’ debt will have already climbed.
  • This, along with a drop in commodity prices and inadequate private investment, makes attracting new promoters difficult for banks.
  • Most SDR instances occur in high-risk industries such as metals, electricity, and capital goods.
  • It is unrealistic to expect a promoter to purchase a 51 per cent ownership in a failing firm in this area.
  • The bank’s time frame of 18 months is insufficient to complete the whole process of starting, running, and selling the firm.
  • Some experts argue that the strategy is ineffective in recovering bad debts. This is mostly due to the lenders’ failure to sell their holdings in the failing firms within the 18-month time frame.
  • They are either unable to sell or forced to sell at a significant loss. After evaluating 15 SDR instances, Religare Institutional Research concluded that the programme raises the danger of deferring NPAs to subsequent years.
  • It has stated that it anticipates more SDR to fail and has postponed the creation of an estimated Rs 1.5 lakh crore in NPAs to subsequent years.
  • The scepticism derives from the fact that most SDR instances have already been strained over the past two years.

Also, check out the article on Banking In India here.

What is the S4A Scheme?
  • The Sustainable Structuring of Stressed Assets (S4A) initiative aims to reduce the economy’s bad debts.
  • This initiative aims to restructure financially burdened projects that have been halted due to significant debts.
  • Under this plan, banks can acquire equity in troubled projects.
  • Banks showed reluctance to provide write-downs under the Sustainable Structuring of Stressed Assets (S4A) program due to the absence of incentives and the potential impact on their capital buffers.
  • The S4A Scheme enables a comprehensive financial restructuring of large enterprises with substantial debts, allowing lenders (banks) to acquire equity in the stressed projects.
  • This program facilitates the financial restructuring of major projects while assisting lenders in managing stressed assets.

Also, check out the article on the Debt to GDP Ratio here.

How Do Banks Restructure Debt?

Banks restructure debt by implementing various strategies and processes to modify the terms and conditions of existing loans. Debt restructuring aims to provide relief to borrowers facing financial difficulties who cannot meet their loan obligations. Banks work closely with borrowers in debt restructuring to evaluate their financial situation and develop a revised repayment plan. This may involve extending the loan tenure, reducing the interest rate, or providing a grace period for repayment.

Debt restructuring can also involve converting debt into equity, where banks may acquire shares or ownership stakes in the borrowing company. This allows banks to become shareholders and participate in the company's performance and future growth.

Conclusion

The SDR scheme has provided numerous benefits to banks, including the continuation of the account’s existing asset classification for 18 months from the reference date, exemption of share acquisition from regulatory ceilings, exemption from investment in para-banking activities and intra-group exposure, and so on. However, it is thought that there is a lack of clarity regarding its legal roots.

In this article, we analyze the structure and features of Strategic Debt Restructuring. We also tried to understand the significance of the Strategic Debt Restructuring for UPSC Exams. To study more topics from the Indian Economy for UPSC, check out our UPSC Online Coaching and download the Testbook App now!

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Strategic Debt Restructuring Scheme- FAQs

The RBI's Strategic Debt Restructuring Scheme, or SDR, allows banks that have made loans to corporations to convert a portion of the total outstanding loan amount and interest into substantial shareholder equity in the firm.

The Corporate Debt Restructuring (CDR) mechanism is a voluntary and non-statutory method, whereas the RBI's Strategic Debt Restructuring Scheme (SDR) permits banks that have made loans to corporations.

The SDR value in terms of the US dollar is computed daily and displayed on the IMF website based on the spot exchange rates observed at roughly noon London time.

The purpose of the Corporate Debt Restructuring (CDR) framework is to provide a prompt and transparent method for restructuring the corporate debts of viable firms for the benefit of all parties.

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