Debt recast plans fail to stem NPAs

Debt-restructuring schemes, including strategic debt restructuring (SDR) and the scheme for sustainable structuring of stressed assets (S4A), are coming apart with the slowdown in sectors such as iron and steel and infrastructure blotting the books of companies.

Some banks have started counting the exposure of companies under SDR as non-performing assets (NPAs). Banks had 18 months after converting 51 per cent of their debt into equity to find investors. However, so far, not a single case of SDR has been successful.

“Banks have not got any new investors for SDR companies. Some of the accounts under SDR have turned into NPAs. When there is no cash flow, we have to go for recovery,” said Pawan Bajaj, managing director and chief executive officer, United Bank of India.

A promoter of an SDR company said banks had also stopped converting debt into equity. Among the steel companies, Monnet Ispat Energy is the only one in which banks had converted debt into equity. The lenders hold 53 per cent in Monnet.

The Reserve Bank of India introduced SDR in June 2015 to allow banks to acquire control of a defaulting company by converting loans into equity and subsequently offloading the stake to an investor. However, it didn’t make much headway.

“In the case of SDR, there has been no success stories although there have been conversions in some cases. Getting a new management is the biggest stumbling block. Now, unless the new management steps in, the old management continues, and after the expiry of 18 months these accounts again slip away,” said R K Takkar, managing director and chief executive officer, UCO Bank. Discussions on new managements for many companies under SDR are under way.

Getting an investor is just part of the problem. The other issue is the haircut (meaning the loan discount that investors are offered) investors want. A banker said banks were not willing to take more than a 25-30 per cent haircut in most SDR cases. Companies, on the other hand, said many investors wanted a haircut of around 50 per cent.

According to a Religare report, the likely haircut was the least in real estate companies at 15-25 per cent, whereas in metal companies, it was as high as 65-80 per cent.

In the case of Electrosteel Steels, which was the first company where SDR was triggered, a number of investors had shown interest, but a deal is yet to be struck. “Neither the banks nor the promoters are willing to take the haircut that was being discussed,” a source said.

The failure of SDR had prompted the RBI to come up with the S4A, under which the loans of companies were split into sustainable and unsustainable, based on the cash flows of the projects. But that too wasn’t much of a success.

“The S4A is also not working well because the sustainable portion should be more than 50 per cent. Industry-wise it has taken place in only one account,” Bajaj said.

“What is required is a debt-restructuring scheme. Neither SDR nor the S4A can work in its current form,” a steel company representative said. 

Steel companies have made representations on this to the government.