RBI tweaks debt rejig norms under S4A route

RBI tweaks debt rejig norms under S4A route
The changes in the Scheme for Sustainable Structuring of Stressed Assets (S4A) is based on the experience gained as well as feedback received from stakeholders, and taking into consideration the requirements of the construction sector, the central bank said in a notification.

Under S4A, the debt is divided into two parts -- Part A will includes debt which can be serviced from the existing operation, while remaining is classified as Part B.

“The sustainable portion (Part A) may optionally be treated as ‘Standard’ upon implementation of the resolution plan by all banks,” RBI said in a notification.

This would be subject to provisions made upfront by the lenders regarding debt.

RBI also said that those assets considered non-performing would continue to be classified as “non-performing investment and provided for as a non-performing asset as per extant prudential norms, as long as such instruments remain in Part B”.

Lenders could upgrade Part B to standard category and reverse the associated enhanced provisions after one year of satisfactory performance of Part A loans.

In case of any pre-existing moratorium in the account, “this upgrade will be permitted one year after completion of the longest such moratorium, subject to satisfactory performance of Part A debt during this period”.

However, the required Mark-To-Market (MTM) provisions need to be maintained at all times.
“Banks shall make disclosures in their annual financial statements on application of the Scheme for Sustainable Structuring of Financial Assets” in a particular format provided by the RBI, according to the notification.

S4A has been introduced to further strengthen the ability of lenders to tackle stressed assets and provide an avenue for reworking the financial structure of entities facing genuine problems. .RBI said the changes in S4A have been carried out with the objectives of harmonisation of stand-still clause as applicable in case of Strategic Debt Restructuring scheme with other guidelines.

In the recent past, the RBI has taken various regulatory measures to strengthen the lenders’ ability to deal with stressed assets.

These include Framework for Revitalising Distressed Assets, Flexible Structuring of Project Loans, Strategic Debt Restructuring scheme and S4A, among others.

Meanwhile, the RBI also issued guidelines on capital requirements for bank exposures to central counterparties (CCPs). It said that capital requirements will be dependent on the nature of CCPs -- Qualifying CCPs (QCCPs) and non-Qualifying CCPs.

“Where a bank acts as a clearing member of a QCCP for its own purposes, a risk weight of 2 per cent must be applied to the bank s trade exposure to the QCCP in respect of OTC derivatives transactions, exchange traded derivatives transactions, SFTs and long settlement transactions,” the guidelines said.

Regarding exposures to non-qualifying CCPs, banks have to apply the Standardised Approach for credit risk.

“Further, a risk weight of 1250 per cent will apply to their default fund contributions to a non-qualifying CCP,” RBI said.

RBI also came out with guidelines on Standardised Approach for Counterparty Credit Risk (SA-CCR). The SA-CCR will be used for computing exposure for default risk capital charge for OTC derivatives, whether centrally cleared or not, exchange-traded derivatives and long settlement transactions.
These guidelines contain the revised method which will replace the Current Exposure Method (CEM), presently being used by banks, for measuring exposure for counterparty credit risk arising from derivative transactions. 

Both the new guidelines will be implemented from April 1, 2018.


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