The S4A: Genuine progress or a mere flash in the pan?

With catchy acronyms such as SDR (strategic debt restructuring), JLF (joint lenders forum), and CAP (corrective action plan), the alphabet soup of the measures taken by the Reserve Bank of India (RBI) over the past 18 months has caught the imagination of industry watchers who had been clamouring for broad-based regulatory measures to assess problematic loans before these became non-performing assets (NPAs) and to clean up Indian banks’ balance sheets before a debt-fuelled financial crisis ensued.

While initially – and to some extent still – criticized by naysayers, these measures have been critical in arresting the growth of NPAs for Indian banks. As a follow-up to its now publically lauded battle to clean up the balance sheets of Indian banks, the RBI on 13 June issued the Scheme for Sustainable Structuring of Stressed Assets (S4A), with the intent of creating a separate mechanism to allow banks more time to write down debt and make provisions for “large accounts”. The S4A is in addition to the JLF mechanism and is only available for borrowers that fulfil the eligibility criteria prescribed in the S4A.

Accounts will be eligible to be resolved under the S4A where: (a) the project has commenced commercial operations; (b) the aggregate exposure (including accrued interest, rupee loans, foreign currency loans and external commercial borrowings) of all institutional lenders is more than ₹5 billion (US$74.5 million); and (c) the stressed facilities fulfil the criteria of “sustainability”.

The S4A prescribes that debt will be considered sustainable if the relevant JLF or lenders conclude, on the basis of an independent techno-economic viability study, that the principal amounts of the borrower’s facilities (both funded and unfunded) from institutional lenders can be serviced over the same tenor as the existing facilities even if the borrower’s future cash flows remain at their current level. For the S4A to apply, 50% of the borrower’s funded facilities should fulfil this test.

Sawant Singh is a partner and Aditya Bhargava is a principal associate at the Mumbai office of Phoenix Legal.