RBI letting banks get more say in troubled firms can be a game changer

Bankers saythat Reserve Bank of India governor Raghuram Rajan’s sympatheticapproach to banks reeling under stressedassets and allowing them take more equity exposure by converting debt in companies whose loans are being recast, can give themuch-needed relief to banks provided pricing is proper.

“This is a forward step,” Sushil Muhnot, chairman and managingdirector of Bank of Maharashtra told FirstBiz.

“The sacrifices made bybanks (during loan recasts) can be converted into equity for a start,“Muhnot said.

Presently, banks are allowed to take up to 10 per cent equity holdingsin companies whose loans are being recast. On Tuesday, afterannouncing the fifth bi-monthly monetary policy of RBI, Rajan said thecentral bank is planning to raise this ceiling to give moreflexibility to banks to put stressed projects back on track.

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RK Bansal, executive director at IDBI Bank said the move can helpbanks if the pricing is right.

The RBI is in discussions with capital market-regulator, Securitiesand Exchange Board of India (Sebi) to arrive at a fair pricing forbanks for equity conversion, Rajan said.

“The key is to see that banksdon’t overpay for the shares and we are in discussions with Sebi tosee that how that can be achieved,” Rajan said.

Indian banks, especially state-run lenders, are reeling under the painof a huge chunk of restructured assets, estimated at about Rs 6 lakhcrore. At least a quarter of this chunk can turn bad if the economy failsto revive and delayed projects do not get back on track. Already aboutRs 2.7 lakh crore worth loans have beenclassified as non-performing assets(NPAs) by banks.

In recent years, the proportion of stressed assets has gone upsubstantially in the backdrop of a prolonged slowdown in the economy,absence of fresh investments and lack of reforms pertaining to landacquisition and availability of natural resources. Banks typically do loan recasts in two channels-under the corporate debt restructuring facility (CDR) and through bilateral loan recasts.

CDR is a forum of lenders which offer relaxed repayment terms to stressed companies by slashing the lending rate, offering a repayment holiday and by elongating the repayment period. In some cases, banks also take a haircut (by sacrificing funds). Over 90 per cent of the stressed assets in the banking system (bad loans combined with restructured loans) are on the books of state-run banks.

The RBI is also considering giving more flexibility to banks to refinance long-gestation infrastructure projects. As per this, loans can be given for a maximum period of 25 years, while the refinancing can be done after every five years.

Abhishek Kothari, analyst at Quant Capital, said the conversion of a larger chunk of debt into equity would help banks to encash part of the stressed assets, but that doesn’t give much assurance about the recovery of the money.

“Banks’ loan exposure is far higher than market cap for some companies like Bhushan Steel. So only a small proportion of debt can be converted into equity,” Kothari said.

Bhushan Steel owes about Rs 40,000 crore to various banks. The firm’s market cap, as on today, is just about Rs 2,300 crore.

Rajan said while banks need to assist companies, which are in genuinestress, tough measures need to be taken against those that defaulton repayments, despite having the ability to repay themby diverting fundsor selling assets.

Of late, banks have toughened their stance on corporates classified aswilfuldefaulters. Once a firm is classified as a wilful defaulter, thecompany or the promoters cannot avail funding from any other banks orfinancial institutions. The wilful defaulter tag virtually ostracizesthe company from the financial system.