RESTRUCTURING OF BANKS IN INDIA

By: Aishwariya Sharma

Aviral Agarwal
Amol Bagul
Aman Khan
Praveen Kumar
BANKING STRUCTURE IN INDIA -
HISTORY
The banking sector in pre-independence India catered primarily to the
needs of the colonial government and its traders, the Indian government
after independence passed targeted legislation to promote rapid industrial
finance for its nascent economy.
A major evolutionary change in the Indian banking eco-system occurred
through large-scale nationalisation of private banks in 1969 and 1980.
Numerous banks were brought under government control, into the public
sector resulting in a dearth of private banking and the dominance of social
banking over commercial banking
Phases of Evolution of Indian Banking
Industry
The entire evolution can be classified into four distinct phases.
1. Phase I- Pre-Nationalisation Phase (prior to 1955) Indian Banking Sector
Challenges and Opportunities
2. Phase II- Era of Nationalisation and Consolidation (1955-1990)
3. Phase III- Introduction of Indian Financial & Banking Sector Reforms and
Partial Liberalisation (1990- 2004)
4. Phase IV- Period of Increased Liberalisation (2004 onwards)
 Phases Major Changes
Phase I Birth of joint stock banking companies
Introduction of deposit banking and bank branches
Pre-Nationalisation phase Presidency bank and other joint stock bank formed
setting the foundation of modern banking system

Phase II State bank of India formed out of imperial bank

Era of Nationalisation and Consolidation 20 SCBs nationalised in two phases
Direct credit programmes on the rise
Introduction of social banking

Phase III Major changes in Prudential regulations

Introduction of Indian financial & banking sector Interest rate deregulated
reforms and partial liberalisation Statutory Pre-emption of resources eased more private
sector players came in strengthened the system as a
whole

Phase IV FDI ceiling for the banking sector increased to 74%

Period of increase liberalisation from 49%
Road map for inclusion of foreign bank declared
More liberal branch licensing policy followed
ORGANISATIONAL STRUCTURE
Indian banking industry has a diverse structure
The present structure of the Indian banking industry has been
analysed on the basis of its organised status, business as well as
product segmentation
The entire organised banking system comprises of scheduled and
non-scheduled banks.
The segment comprises of the scheduled banks, with the
unscheduled ones forming a very small component.
 Indian Banking
Industry

Scheduled Unschedule
Banks d Banks

Scheduled Commercial Scheduled Cooperative

Banks Banks
SBI & Associates
Nationalised Banking
Rural Urban
Foreign Banks Cooperative Cooperative
Regional Rural Banks Banks Banks
Other Scheduled Commercial
Banks
Short Long Multi-
Term Signal
Term estate

State, district &

primary level SCARDBs &
Cooperatives banks PCARDBs
Recent Developments
The Indian banking sector has recently witnessed numerous measures aimed
at:
Ensuring non-default of loans to reduce the NPA burden on PSBs

Ensuring flow of finance to the industrial/corporate sector

Curbing the parking of black money outside India

Promoting governance best practices

Introducing a benchmark lending rate

Key Developments
The Bankruptcy Code, 2015
Corporate Debt Restructuring (CDR)
The Black Money (Undisclosed Foreign Income and Assets) and
Imposition of Tax Act, 2015
The Insolvency and Bankruptcy Code, 2015
Bankruptcy refers to legal process of liquidation of business entity
which has not been able to repay its debts out of its current assets

Insolvency on the other hand refers to a situation where individuals or

companies are unable to repay their outstanding debt
Introduction
The Indian Parliament passed The Insolvency and Bankruptcy Code,
2015 on May 12, 2016 which may prove to be the long awaited and
much needed for the banks ridden with Non-Performing Assets (NPAs).
Indian PSU Banks have been suffering with the problem of rising NPAs
An asset becomes non-performing when it ceases to generate income
for the bank.
A non performing asset (NPA) was defined as credit in respect of
which interest and/ or installment of principal has remained past due
for a specific period of time. They are basically loans and advances on
which the debtor has defaulted in repayment of loan.
The Bankruptcy Code
Being bankrupt is a state of inability to repay debts to creditors.

Under the proposed law, a bankrupt entity is a debtor who has been
adjudged as bankrupt by an adjudicating authority that has passed a
bankruptcy order.

The adjudicating authority would be the National Company Law Tribunal

(NCLT) for companies and limited liability partnerships, and the Debt
Recovery Tribunal (DRT) for individuals and partnership firms.
Resolution Process
When a loan default occurs, and either the borrower or the lender
approaches the NCLT or DRT for initiating the resolution process.

The creditors appoint an interim Insolvency Professional (IP) to take

control of the debtors assets and companys operations, collect financial
information of the debtor from information utilities, and constitute the
creditors committee.
Resolution Process
The committee has to then take decisions regarding
insolvency resolution by a 75% majority.

Once a resolution is passed, the committee has to decide

on the restructuring process that could either be a revised
repayment plan for the company, or liquidation of the
assets of the company.
Resolution Process
If no decision is made during the resolution process, the
debtors assets will be liquidated to repay the debt.

The resolution plan will be sent to the tribunal for final

approval, and implemented once approved.
Need for Bankruptcy Code
Indias banking industry is in the throes of a crisis.
Bad debts are piling up at banks.
According to central bank data, stressed assets (which
include gross bad loans, advances whose terms have been
restructured and written-off accounts) rose to 14.5% of
banking sector loans at the end of December 2015.
Thats almost Rs 10 trillion of loans that are stuck.
Freeing up this money is crucial for the banking sector to
go about its business.
Need for Bankruptcy Code
1. To ensure revival before Liquidation
2. Need of a Unified Code
3. To provide an easy exit for corporates
4. Reduce the mounting NPAs on banks
NPAs CLASSIFICATION
A standard asset is a performing asset. It regularly produces income for the
bank. NPA are classified under the following heads:
Sub-Standard Assets : All those assets that is loans and advances which
are considered as non-performing for a period of more than 90 days but
less than 12 months are called as Sub-Standard assets. For less than 90
days, they are included in Special Mention Account.
Doubtful Assets: All those assets in the Sub-Standard Assets category
which exceed the period of 12 months are called as Doubtful Assets.
Loss Assets: All those assets which cannot be recovered are called as Loss
Assets.
Special Mention Accounts
Before a loan account turns into an NPA (Non-performing asset), banks are
required to identify incipient stress in the account by creating three sub-
categories:
SMA-0 (Principal or interest payment not overdue for more than 30 days
but account showing signs of incipient stress)
SMA-1 (Principal or interest payment overdue between 31-60 Days)
SMA-2 (Principal or interest payment overdue between 61-90 Days)
Options Available to banks for Stressed Assets
Rectification
Exit from the account
Restructuring
Rehabilitation
Compromise
Legal Action
Insolvency regime in India
Informal framework (prominently based on RBI Guidelines)
Corporate Debt Restructuring
Joint Lenders Forum (JLF)
Strategic Debt Restructuring
Scheme for Sustainable Structuring of Stressed Assets (S4A)
Debt Restructuring
Debt Restructuring
It is a method used by companies to avoid default on existing debt by
altering terms & conditions of the existing debt issue
Or to take advantage of a lower interest rate by taking a new debt after
settling the previous one.
Standard Restructured Advances
A standard restructured account is one where the bank, grants to the
borrower concessions that the bank would not otherwise consider.
A restructured advance would normally involve:
Modification of terms of the advances/securities
Alteration of repayment period/repayable amount/ the amount of
installments and rate of interest.
Types Of Debt Restructuring
Debt restructuring can be of two kinds:
General: Under the terms of general debt restructuring, the creditor incurs

no losses from the process. The lender decides to extend the loan period, or
lowers the interest rate, to enable the debtor to recover from a temporary
financial difficulty and pay the debt later
Troubled: Troubled debt restructuring refers to the process where the

lender incurs losses in the process. This happens when it leads to a

reduction in the accrued interest, a dip in the value of the collateral, or
conversions to equity
Why Debt Restructuring?
It is required when a debtor is experiencing:
Financial difficulties because of default on any of its debt
Is in bankruptcy
Has securities that have been delisted
Cannot obtain funds from other sources
Projects that it cannot service its debt
Or there is significant doubt about whether it can continue to be a going
concern.
Benefits
It is meant to help both the parties.
It involves compromises made by the lender as well as the debtor to ensure
that the loan is repaid in full to the creditor without too much of a financial
loss to the debtor.
Corporate Debt Restructuring (CDR)
The system got evolved and detailed guidelines were issued by RBI on
August 23, 2001 and were revised on February 5, 2003.
It refers to restructuring of the outstanding debts of a company when it
find its difficult to repay the same.
Comprises of provisions of moratorium, spreading the obligations over a
longer period of time, conversion of part of the debt into equity or
preference capital , reduction of interest rate, payments out of promoters
contribution / sale of surplus assets etc.
Scope of CDR
Organizational framework institutionalize for speedy disposal of
restructuring proposals
Available to all borrowers engaged in any type of activity subject to the
following conditions :
1. The borrower enjoys credit facilities from more than one bank / FI under
multiple banking / syndication / consortium system of lending.
2. The total outstanding (fund-based and non-fund based) exposure is Rs.10
crore or above.
Structure of CDR system
CDR system is having three tier structure :
CDR Standing Forum and its Core Group
CDR Empowered Group
CDR Cell
CDR Standing Forum and its Core Group
CDR Standing forum is Representative general body of all financial
institutions and banks participating in CDR system.
It comprises of CMD, IDBI; Chairman, SBI; MD & CEO, ICICI Bank;
Chairman, Indian Banks Association as well as Chairmen and Managing
Directors of all Banks and FIs participating as permanent members in the
system.
It is an Official platform for both the creditors and borrowers (by
consultation) to amicably and collectively evolve policies and guidelines.
CDR Standing Forum and its Core Group
CDR Core Group is carved out of the CDR Standing Forum to assist the
Standing Forum in convening the meetings and taking decisions relating to
policy, on behalf of the Standing Forum

The CDR Core Group lays down the policies and guidelines to be followed
by the CDR Empowered Group and CDR Cell
CDR Empowered Group
It Consists of ED level representatives of IDBI , ICICI and SBI as standing
members, in addition to ED level representatives of FIs and Banks who
have an exposure to the concerned company.
It Considers the preliminary report of all cases of requests for
restructuring, submitted to it by the CDR Cell.
It decides whether to take up the restructuring or not and afterwards
approves the restructuring plan prepared by the CDR Cell.
If restructuring of debt is found to be viable and feasible and approved by
the Empowered Group, the company would be put on the restructuring
mode
CDR Cell

The CDR Standing Forum and the CDR Empowered Group will be
assisted by a CDR Cell in all their functions
All references for CDR by creditors or borrowers will be made to the CDR
Cell.
Will make the initial scrutiny of the proposals received from borrowers /
creditors, by calling for proposed rehabilitation plan and other information
Will put up the matter before the CDR Empowered Group, within one
month to decide whether rehabilitation is prima facie feasible.
CDR Cell

It will prepare the restructuring plan in terms of the general policies and
guidelines approved by the CDR Standing Forum and place for
consideration of the Empowered Group within 30 days for decision.

The Empowered Group can approve or suggest modifications but ensure

that a final decision is taken within a total period of 90 days.
Corporate Debt Restructuring
CDR packages of 44 firms with a debt of Rs.27,015 crore failed in FY
2015
Only 5 firms with debt of Rs.1,399 crore managed to exit the CDR
successfully.
Outstanding CDR failures almost doubled to Rs.56,995 crore in March
2014
In a bold move, the RBI empowered banks to take control of a company if
it fails to meet specific milestones under the corporate debt restructuring
(CDR) plan.
To achieve the change in ownership, the lenders under the Joint Lenders
Forum (JLF) should collectively become the majority shareholder by
conversion of their dues from the borrower into equity
Strategic Debt Restructuring Scheme
Introduction
The concept of Strategic Debt Restructuring ("SDR") was introduced by
the Reserve Bank of India (the "RBI") in the SDR Scheme (the "Scheme")
to help banks recover their loans by taking control of the distressed listed
companies.
The Scheme was enacted with a view to revive stressed companies and
provide lending institutions with a way to initiate change of management
in companies which fail to achieve the milestones under Corporate Debt
Restructuring ("CDR").
The Scheme is subsequent to CDR or any other restructuring exercise
undertaken by the companies.
Strategic Debt Restructuring Scheme
The scheme that will give lenders the right to convert their outstanding
loans into a majority equity stake if the borrower fails to meet conditions
stipulated under the restructuring package.
SEBI allowed conversion of loans to shares on 22nd March, 2015 while
RBI formalized the proposal on 8th June, 2015.
Eligibility
I. Conversion of outstanding debts can be done by a consortium of lending
institutions. Such a consortium is known as the Joint Lenders Forum
("JLF").
II. The JLF may include banks and other financial institutions such as
NBFCs.
III. The Scheme will not be applicable to a single lender
Conditions
I. At the time of initial restructuring, the JLF must incorporate an option in
the loan agreement to convert the entire or part of the loan including the
unpaid interest into equity shares if the company fails to achieve the
milestones and critical conditions stipulated in the restructuring package.
II. This option must be corroborated with a special resolution since the debt-
equity swap will result in dilution of existing shareholders.
III. Such a mandate will result in the lenders acquiring a majority (51%)
ownership.
IV. If the company fails to achieve the milestones stipulated in the
restructuring package, the decision of invoking the SDR must be taken by
the JLF within thirty (30) days of the review of the account during the
restructuring.
V. The JLF must approve the debt to equity conversion under the Scheme
within ninety (90) days of deciding to invoke the SDR.
VI. The JLF will get a further ninety (90) days to actually convert the loan
into shares.
Post Debt-Equity Swap
I. On completion of conversion of debt to equity as approved under the
Scheme, the JLF shall hold the existing asset status of the loan for another
18 months.
II. The JLF must divest their holdings in the equity of the Company. If the
JLF decide to divest their stake to another Promoter, the loan will be
upgraded to 'Standard'.
III. The 'new promoter' should not be a person/entity from the existing
promoter/promoter group. However, the quantum of provisions held by
the bank as on the date of the divestment will not be reversed.
Pros and Cons
Pros:
Possibility to recover bad loans.
Possibility for companies to restructure

Cons:
Banks lack in-depth knowledge for operations
Difference between Corporate Debt
Restructuring(CDR) and Strategic Debt
Restructuring(SDR)
Scheme for Sustainable
Structuring of Stressed Assets
(S4A)
Scheme for Sustainable Structuring of
Stressed Assets (S4A)
Under this scheme, large ticket loans are restructured by separating a
sustainable loan from an unsustainable loan.
The lenders are required to make this classification.
Sustainable level of debt is one which the banks think the stressed
borrower can service with its current cash flows. This sustainable level of
debt should not be less than half the loans or funded liabilities of the
stressed entity.
Banks can convert the unsustainable debt into equity or equity related
instruments, which are expected to provide upside to the lenders in case
the borrower cannot regain the glory and rework the financial structure.
Scheme for Sustainable Structuring of
Stressed Assets (S4A)
The main aim of S4A:
Strengthen the lenders ability to deal with stressed assets
Put real assets back on track of entities facing genuine difficulties by
providing an avenue for reworking financial structure
Pros of S4A
The new guidelines will help banks to manage their NPAs.
It will help banks to speed up the asset recovery process as they are
required to clear their books by March 2017.
Borrowers will get another opportunity to rework its financial structure.
Oversight of an external Overseeing Committee (OC) will ensure
transparency and save the banks from undue scrutiny from enforcement
agencies.
Consortium Lending
Consortium Lending
When a borrower chooses to avail finance from two or more banks by
submitting a common application and financial statements, the financial
arrangement is called consortium lending.
The borrower appoints lead bank and member banks.
Except rate of interest, other terms and conditions / documentation would
be common in this case.
Public vs Private Sector Banks
Public Vs Private Sector Banks
1. Public : Majority S/H Government

2. Private : Majority S/H Individual

3. All most all the major Public and Private banks are scheduled banks.
Public Sector Banks: NPAs

Source: Performance of Indian Public Sector Banks and Private Sector Banks: A Comparative Study K. Chaudhary & M Sharma, IJIMT
Vol.2, No-3, June 2011
Private Sector Banks: NPAs

Source: Performance of Indian Public Sector Banks and Private Sector Banks: A Comparative Study K. Chaudhary & M Sharma, IJIMT Vol.2,
No-3, June 2011
NPA & Classifications

Source: Performance of Indian Public Sector Banks and Private Sector Banks: A Comparative Study K. Chaudhary & M Sharma, IJIMT Vol.2,
No-3, June 2011