Strategic Debt Restructuring and Loan Recovery

Deteriorating loan asset quality in banks in India is a matter of great concern. Over the past two years, the level of stressed loans (gross non-performing assets and restructured standard debt) has shown a continuous rise and may reach even 12 percent by the end of the current fiscal 2015–16. This slippage in loan asset quality, in turn, slows down the growth in fresh sanctions by banks. Investors of large/mega projects become hesitant to invest, further hurting economic growth and job creation. Appreciating a need to make loan recovery from stressed assets on a war footing, several initiatives have been taken by Reserve Bank of India (RBI) over the years and, the recent one is Strategic Debt Restructuring (SDR) Scheme which was introduced in June 2015 The scheme allows banks to convert debt into equity of defaulting companies. By this conversion, lenders would be able to exercise control over management of companies which is found to be inefficient and dishonest. The scheme permits the lenders to change the present management of defaulting companies and look for a new promoter to whom their equity to be transferred for loan recovery. For this purpose, the scheme expects the lenders to observe due diligence under the scheme and develop the required expertise. But there are numerous challenges before lenders to comply with terms and conditions under the scheme. Though there is enough potential to rely on this scheme for loan recovery, there is hardly any success. Therefore, the present paper attempts to make an overview of the SDR scheme by discussing issues and suggestions.