Tackling bad loans: Banks can now take equity in debt-laden companies

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MUMBAI: The Reserve Bank of India has thrown a lifeline for overleveraged companies and banks to put an end to future bad loans by permitting capital restructuring which would see banks taking equity in companies. But the plan comes with a lot of riders that limit scope for promoters gaming the system, and banks don’t sweep doubtful loans under the carpet.

Under the plan, christened Scheme for Sustainable Structuring of Stressed Assets (S4A), banks can split the overall loans of struggling companies into sustainable and unsustainable based on the cash flows of the projects. The amount of loan that current or predictable future cash flows could sustain is sustainable and called Part A, RBI said. The remaining Part B can be converted into equity or a convertible security.

“Resolution of large borrowal accounts which are facing severe financial difficulties may, inter-alia, require co-ordinated deep financial restructuring which often involves a substantial write-down of debt or making large provisions,” RBI said in a statement. “Often such high write-downs act as a disincentive to lenders to effect a sustainable change in the liability structure of borrows facing stress.”

If a company with Rs 5,000 crore of loans has a cash flow that can pay interest only on Rs 3,000 crore of debt, then it could be termed Part A. The remaining could be converted into equity or a convertible security. “This is new ammunition to fight war on NPA and hopefully it will give us some room to revive sustainable units and protect the economic value of the projects,” said Arundhati Bhattacharya, chairman, State Bank of India.

“And frankly there are not many funds as yet in the market to finance these projects.” Governor Rajan’s latest round of restructuring rules come amid crippling bad loans in the banking industry. Although the clean-up drive has led to bad loans surging to as high as Rs 6 lakh crores, 4.35% of total bank loans, there is a lot of stress in the system.

Total stressed assets (bad loans+standard restructured loans) is estimated to be 15% of total bank loans. The poor equity contribution of many projects make them unviable as the cash flows are not enough to pay interest.

Banks define Part A and Part B after a Techno-Economic Viability which should forecast that at least half the debt is sustainable, RBI said. There could be at least Rs 1 lakh crore of loan which could be restructured under this process, say analysts.

Projects with a loan of at least Rs 500 crores and have commenced commercial operations are eligible to be restructured under S4A. At least half the total loans have to be sustainable. When banks opt for this plan, there should be no extension of payment deadlines, or moratorium for the Part A which will remain as loans on the banks and the companies’ books, it said.

To ensure that the process for all accounts remain uniform, the RBI has said that the Joint Lenders’ Forum which will finalise this, has to submit it to a Overseeing Committee which would be formed by the lobby group Indian Banks’ Association. It would also have the blessings of the RBI and no member can be inducted or thrown out without RBI’s approval.

“The guidelines are a great help to banks and industry because it offers a number of solutions,” said RK Bansal, executive director, IDBI Bank.

“Banks will have to take a haircut and make provisions up to 40% in some cases. We have been stuck with some cases for a long time because there are no buyers for the assets, this will help in resolving these cases.”

Lenders can convert the loans into equity under the Strategic Debt Restructuring scheme and can be sold to a new promoter. Either the old promoter, or a new one will have the right of first refusal when banks decide to sell at a price higher than the pre-determined level, it said.

In a separate notification, RBI allowed banks to amortise the shortfall on sale of NPAs to security receipts by another year up to March 31, 2017. However, for assets sold in the current fiscal year ending March 2017, banks will be allowed to amortise the shortfall only for a period of four quarters from the quarter in which the sale took place.