After Suzlon sale, more distress sales coming as banks toughen stand on dues

The decision of wind turbine maker Suzlon Energy to sell its German arm Senvion for a not-so-attractive valuation of Rs 7,200 crore to US-based Centerbridge Partners LP, to pare part of its Rs 17,500 crore debt, tells us what is in store for companies with massive debt obligations to their lenders.

Behind the Suzlon deal agreement, the domestic lenders to the company, including the country’s largest lender, State Bank of India (SBI), has played a key role in the fast execution of the deal.

On Thursday, speaking to CNBC-TV18, SBI chairman Arundhati Bhattacharya confirmed that banks have been indeed acting behind the asset sale of Suzlon. “As you know we had been pushing with a lot of people to sell assets in order to deleverage balance sheets. This deal of Suzlon is precisely in that line,” Bhattacharya said.

Suzlon’s hurried sale of its profit making subsidiary is totally an expected move considering the enormous bad loan levels on the books of Indian Banks and the mounting pressure on them from the Reserve Bank of India (RBI) and the government to clean up their balance-sheets by recovering money.

A major chunk of the stress is with those lenders owned and run by the government.

Going ahead, one could see more such asset sales. “The push has begun. The process is working,” said the chairman of a leading state-run bank based in Maharashtra to Firstpost.

According to senior bankers and analysts, there are several cases where lenders are currently negotiating with companies to sell assets and pare debt.

“Bankers will push for such sale of distressed assets,” said Abhishek Kothari, analyst at Quant Broking Pvt Ltd. “Asset sale will help to recover part of their (banks’) loans from companies”.

Banks, through consortium arrangement, has taken large exposure to several firms, which are currently struggling to pay back their loans. Bhushan Steel, which owes between Rs 35,000 to Rs 40,000 crore to a clutch of banks including SBI, is among them. “Bhushan Steel also has very good assets,” Kothari said hinting that the company could also explore the asset sale route to trim a substantial part of its debt.

In yet another case, debt-ridden Lanco infrastructure too has been trying to sell some of its assets to reduce its debt burden.

Prodding companies sell their assets to pay back to banks is something which RBI governor Raghuram Rajan has cited as an effective way to clean up the banking system, shortly after he took over as the central bank governor.

In an interview to the Mint, Rajan said it was heartening to see large Indian companies selling assets. “We need more of that,” Rajan said.

As Firstpost noted earlier, persisting stress in the banking sector can also spoil the expectation that the RBI rate cuts will enable a faster economic revival since banks, until their bad loan situation is contained, will be reluctant to lend more to firms, despite southward rate signals from the central bank.

Among sectors, infrastructure is the segment where most of the pain is emerging for state-run banks. The proportion of infrastructure loans to the total chunk of restructured loans under the corporate debt restructuring (CDR) channel grew to 22 per cent, or Rs 58,554 crore, making is the largest contributor to the restructured loan pile.

CDR is a mechanism under which banks offer relaxed repayment terms to a stressed borrower to aid the firm tide over the crisis.

The stressed asset situation of state-run banks hasn’t shown any major improvement as yet, even though a clearer picture will emerge only after large government banks announce their December quarter earnings numbers.

Until September, the gross bad loans on banks’ balance sheets have already grown beyond Rs 2.7 lakh crore, which, coupled with restructured advances, takes the actual chunk of stressed loans in the banking sector to above 10 percent of the total loans given.

Thus, selling non-core assets to clean-up the balance sheets, will be a win-win situation for both banks and the companies since this will make sure banks are in a position to lend further to companies with viable projects.

If not, the stickiness on lending book would discourage banks to expand their lending portfolio further as is seen in the past. In the last two financial years, there haven’t been any large-scale lending from banks to companies to execute new projects, whereas most banks have been increasingly focusing on low-risk retail customers to grow their book.