A new lever for PE funds

Feb 18 2014, 04:15 IST
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SummaryThe new RBI framework for action on NPAs opens up the buy-out market for PEs

In a significant move, RBI recently laid out a framework to identify an action plan for addressing the NPA issues in the financial system and for revitalising distressed assets. While, on one hand, these guidelines could be considered a warning about the magnitude of the NPA problem, on the other, this framework can be seen as significant change in the overall approach toward this issue.

The framework, effective from April 1, outlines a corrective action plan that will offer incentives for early identification of stressed assets by banks, timely revamp of accounts considered unviable, and prompt steps for recovery or sale of assets in the case of loans at the risk of turning bad.

Under this framework, lenders will need to carve out a special category of assets termed special mention accounts (SMAs) in which early signs of stress are visible and accounts within this category will be put under three sub-categories, based on the period of outstanding. The framework envisages formation of a joint lenders’ forum for early resolution of stress and it also lays down timelines within which the forum needs to arrive at a solution. There is also a provision under the new framework for independent evaluation of large-value restructuring. It is interesting to note that RBI has thought of some minute details as well in these recommendations. For example, the issue of priority in repayment for statutory dues against the rights of creditors has been a vexed issue. RBI proposes to discuss this with the government and try to fix a limit for the claims that can be made by such regulatory authorities.

One important aspect of this new development is that it now also covers NBFCs within its fold by requiring notified Systemically Important NBFCs and NBFC Factors to furnish information regarding credit information of their customers to the central repository to be created.

However, a very interesting facet of this whole framework is the recognition of private equity investors as part of the restructuring process. For the first time, the regulator seems to have officially recognised private equity as a separate class, although there is no formal definition for this class in the guidelines. The framework specifically lays down that private equity firms and large NBFCs will be allowed to participate in auctions of NPAs through explicit regulatory affirmation. Such firms would also be provided authority under the Sarfaesi Act on a selective basis. The framework

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