Relook into textile debt rejig scheme

ECB route to restructure term loans fails to take off

The government is planning to re-work the textile debt restructuring scheme since the present format of asking banks and financial institutions to use the External Commercial Borrowings (ECB) route to restructure term loans of textile units has not taken off.

Textiles ministry officials told Business Standard the ministry would soon make suggestions to the finance ministry on the changes that could be made in the scheme.

"We will seek the implementation of the restructuring scheme as per our earlier proposal, under which a reconstruction fund with a corpus of around Rs 500 crore was to be created," an official said.

The textiles ministry proposal was formulated on the basis of recommendations made by the NK Singh committee on textiles.

The main purpose of the restructuring scheme made effective from September 2003 was to allow reconstruction or restructuring of debt of existing long-term viable units, which are either profitable or currently in losses but potentially viable in future. As per the scheme, banks will be allowed to lend to the textile sector at low rates of 8-9 per cent.

The total exposure of financial institutions to the sector in the form of term loans is estimated at Rs 10,000 crore, of which one-third is not likely to be revived. The scheme is therefore targetted at restructuring the remaining Rs 6,000 crore term loans.

According to industry sources, the present scheme could not succeed because it was not implemented by banks in letter and spirit.

As per the scheme announced by the government, banks are allowed access to ECBs and are supposed to convert accumulated interest liability of textile units into zero coupon bonds payable after five years.

"However, banks such as the Industrial Development Bank of India (IDBI), which have the maximum exposure in the textile sector, are insisting that nine per cent interest be paid on such accumulated interest. If a textile unit has the capability to pay the interest on his already accumulated interest why will it go for restructuring," industry sources said.

On the other hand, banks are reluctant to convert interest liabilities into zero coupon bonds on grounds that this would have substantial impact on the profitability.

Debt churn

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• Under the proposed restructuring scheme, a reconstruction fund with a corpus of around Rs 500 crore is to be created.
• The aim is to restructure the debt of existing long-term viable units, which are either profitable or have future potential.
• The total exposure of financial institutions to the sector in the form of term loans is estimated at Rs 10,000 crore.