 "RBI to offer more flexibility to banks in debt restructuring")
The Reserve Bank of India (RBI) will offer more flexibility to banks while restructuring corporate loans, its governor, Raghuram Rajan said on Tuesday.
The central bank will permit the use of 5-25 rule for loan restructuring of existing projects, which are classified as standard assets. In the 5-25 structure, a bank could fix longer amortisation period (about 25 years) for loans to projects in infrastructure and core industry sectors, with periodic refinancing (say every five years). Such restructuring would enable loan repayment to be co-terminus with cash flows from the projects. It would also improve debt-servicing capacity and viability of the operational projects.
"There is substantial stress in some sectors. We have been taking a holistic view, instead of a sector by sector view keeping in mind the need for flexibility in financial restructuring while limiting the extent of forbearance. In the next few days, I hope to be able to announce two key relaxations — one is a move towards 5:25 restructuring for existing projects, which are standard and also to allow banks to take equity in restructurings to a great extent than they currently can," Rajan told reporters in Mumbai.
"This (taking more than 10 per cent equity) was the case before May, 2013. So, we are reverting to an older policy. The key issue is the price. That was the concern then and that is what we are discussing with SEBI (Securities and Exchange Board of India) as of now. The key issue is to ensure that the transaction is done at a fair price so that banks are not over paying and minority shareholders don't get a raw deal," Rajan said.
He added that banks have been demanding for this relaxation as it will benefit the lenders once a project is back on track. But it is not necessary that banks will always want to take more than 10 per cent equity stake . Such decisions will be made after assessing the viability of the project.
Bankers said both the relaxations will benefit lenders as project viability will improve.
"Both of these are very positive for banks. I really don't understand why a project, if it is new, should be given the advantage of repaying over a longer period of time whereas the existing project should not be given the same facility. Both should be on the same level platform. So, it will be good for banks as we would be able to refinance many of the loans where projects are working and cash flows are seen,” Arundhati Bhattacharya, chairperson of State Bank of India (SBI), said.
"In respect of conversion of debt to equity, this is required in respect of those projects where we are sure of the viability and where banks can actually have a piece of the upside when the projects turnaround. Also, this will improve viability," she added.
The central bank will permit the use of 5-25 rule for loan restructuring of existing projects, which are classified as standard assets. In the 5-25 structure, a bank could fix longer amortisation period (about 25 years) for loans to projects in infrastructure and core industry sectors, with periodic refinancing (say every five years). Such restructuring would enable loan repayment to be co-terminus with cash flows from the projects. It would also improve debt-servicing capacity and viability of the operational projects.
"There is substantial stress in some sectors. We have been taking a holistic view, instead of a sector by sector view keeping in mind the need for flexibility in financial restructuring while limiting the extent of forbearance. In the next few days, I hope to be able to announce two key relaxations — one is a move towards 5:25 restructuring for existing projects, which are standard and also to allow banks to take equity in restructurings to a great extent than they currently can," Rajan told reporters in Mumbai.
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Currently, banks are allowed to take maximum 10 per cent equity in a restructured project.
"This (taking more than 10 per cent equity) was the case before May, 2013. So, we are reverting to an older policy. The key issue is the price. That was the concern then and that is what we are discussing with SEBI (Securities and Exchange Board of India) as of now. The key issue is to ensure that the transaction is done at a fair price so that banks are not over paying and minority shareholders don't get a raw deal," Rajan said.
He added that banks have been demanding for this relaxation as it will benefit the lenders once a project is back on track. But it is not necessary that banks will always want to take more than 10 per cent equity stake . Such decisions will be made after assessing the viability of the project.
Bankers said both the relaxations will benefit lenders as project viability will improve.
"Both of these are very positive for banks. I really don't understand why a project, if it is new, should be given the advantage of repaying over a longer period of time whereas the existing project should not be given the same facility. Both should be on the same level platform. So, it will be good for banks as we would be able to refinance many of the loans where projects are working and cash flows are seen,” Arundhati Bhattacharya, chairperson of State Bank of India (SBI), said.
"In respect of conversion of debt to equity, this is required in respect of those projects where we are sure of the viability and where banks can actually have a piece of the upside when the projects turnaround. Also, this will improve viability," she added.