Consensus eludes banks on debt restructuring

Reluctant small lenders and headless public sector banks make the task of lender groups difficult

In April, two large banks called a meeting of the chief executives of 24 banks that together have an exposure, fund as well as non-fund based, of Rs 50,000 crore to Essar Steel to discuss the loan restructuring proposal of the company.

The amount was huge and the banks were worried about the loan turning into a non-performing asset, which happens once repayment of principle and/or interest is due for more than 90 days. If that were to happen, the rot would show in the annual P&L of the banks. Some of the lenders with a large exposure to Essar Steel were State Bank of India (Rs 9,333 crore), Canara Bank (Rs 4,904 crore), Punjab National Bank (Rs 3,885 crore) and ICICI Bank (Rs 3,499 crore). The issue needed to be sorted out on a priority basis.

So the meeting was called to finalise the contours of the debt recast. However, none of the chief executives of the banks with a relatively smaller exposure turned up for the meeting, frustrating the bigger ones that were keen to seal the deal as quickly as possible.

This case highlights the state of affairs at a time when the banking sector is seeing a steady rise in its portfolio of stressed assets. The Reserve Bank of India came out with new rules last year to incentivise banks to recognise and resolve stress at an early stage. The concept of a joint lenders' forum was floated - a group of lenders that will be formed if a borrower is facing stress and will take proactive steps to resolve the issue.

  The banking regulator did everything that it could. It laid down the new rules, and gave banks flexibility. However, the ground realities are somewhat different. To begin with, consensus is elusive: 75 per cent of the banks by value and 60 per cent by number in the joint lenders' forum should agree to a debt recast proposal for it to go through.

In Essar Steel's case, while most banks provided additional funds to the company and have refrained from classifying it as a non-performing asset, some lenders like HDFC Bank (which sold its exposure) and Bank of India have chosen to do so. Bank of India said that for some accounts where repayment was made on the 92nd or 93rd day, the upgrade will happen in the current quarter.

Essar Steel is just one example. There are many more cases where banks are not on the same page so far as debt recast is concerned.

Lenders with smaller exposures say there is no point in throwing good money after bad, which explains their reluctance to restructure loans. They cite the example of HDFC Bank which has sold its Rs 550-core Essar Steel exposure to an asset reconstruction company at 40 per cent discount. "Are the HDFC Bank people fools? They exited because they saw no merit in putting in additional funds for the restructuring of the debt," says the chief executive of a public sector bank with a small exposure to Essar Steel.

"The fact is that everybody (all banks) is not able to move in step. We have to understand that if you have a joint lenders forum, then everybody should have the ability to take calls. Now, very often very junior people come into the joint lenders' forum and they are not in a position to take decisions," State Bank of India Chairperson Arundhati Bhattacharya told Business Standard in an interview earlier this month.

No decision taker
The other reason many banks are hesitant to take a call is because they don't have a full-time chief executive. In India, most public sector banks are CEO-driven. The fate of a government bank swings with the appointment (and retirement too) of a chief executive. Currently, the top post in many banks, including large ones like Punjab National Bank, Bank of Baroda, Canara Bank, Bank of India, and mid-sized ones like Indian Bank and Andhra Bank, are vacant. (An executive director has been given the charge of MD & CEO in these banks till the vacancy is filled). The top position at IDBI Bank will also fall vacant from July 1.

"Some banks do not have a CEO. Even though there are very responsible people heading those banks, they are there for a very limited period of time. As a result, they may not be keen on taking decisions that could later be questioned," SBI's Bhattacharya said. RBI is also aware of the situation. However, not much can be done by the regulator because this is the banks' internal matter. However, RBI expects the Indian Banks' Association and government's intervention could be helpful in sorting out the issues.

"We have received representations from bigger lenders about non-cooperation from a few lenders. On the other hand, smaller lenders have voiced their concerns about being arm twisted by bigger lenders. Unless there is proper co-ordination between the interested parties, all the revival efforts are likely to fall flat," RBI Deputy Governor SS Mundra said last month.

The stressed asset scenario in the banking system is alarming. Though fresh stressed asset (non-performing assets and restructured loans) formation in 2015-16 declined to 5.6 per cent (of gross advances) from 6 per cent in the previous year, the total stock of stressed asset in March 2015 was 10.6 per cent as compared to 9.1 per cent during the same period of the previous year, according to a study done by rating agency ICRA. Banks' gross non-performing assets increased to Rs 3.1 lakh crore as on March 2015 compared to Rs 2.5 lakh crore in the previous year.

A few days ago, RBI issued new rules that allow banks to take 51 per cent in the borrowing company if it fails to repay debt even after restructuring. Bankers say the new norms will put pressure on the borrowers to perform but such a scenario will emerge at a later stage - after the restructuring is approved. For them, the burning issue right now is to get everybody on board and build consensus on debt restructuring.