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Giving a big boost to acquiring stressed assets, Reserve Bank of India (RBI) on Tuesday further eased the rules for loan restructuring to bring in new promoters for stalled projects.
In its monetary policy review on Tuesday, RBI said lenders will have more flexibility to extend the date of commencement of commercial operation (DCCO) to facilitate a change in ownership and revival for stalled projects.
This could be done without changing the asset classification for loans to projects. If the advance is standard, it would be treated in the same way even after recasts that brings a new promoter on board.
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RBI is also in talks to hammer out a deal with the market regulator to beef up the equity banks can hold if they swap bad debts for shares. Currently, banks cannot be left with a holding of more than 10 per cent after a debt-for-equity swap. That is set to increase to 30 per cent.
State Bank of India Chairman Arundhati Bhattacharya said the easing of norms in treatment of loans for stalled projects when a new promoter is brought in would change the way stressed accounts are handled. The differential pricing formula for converting loans into equity under the debt recast package will strengthen lenders.
Bankers and top corporate executives said RBI’s moves would help to hasten pace of resolving problem cases. The entire effort is to find early closure to problem cases than dragging them.
R Shankar Raman, chief financial officer, Larsen & Toubro Ltd, said the steps announced reflect RBI’s resolve to tackle the problem of non-performing assets (NPAs) in important sectors like infrastructure. “Flexibility to reset the date of commencement for commercial operations and convert debt into equity at the intrinsic values are very pragmatic steps,” he said.
The banking regulator made it clear that it will stick to its decision to end regulatory forbearance by March 2015 for loan restructuring.
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TACKLING CORPORATE DISTRESS The Reserve Bank of India on Tuesday announced solutions to three specific problems that banks were facing while dealing with corporate stress. Here are the problems and their prescriptions: |
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PROBLEM: Acquisition of stressed companies was difficult due to non-performing asset (NPA) stigma PRESCRIPTION: In case of a promoter change of stressed project loans, date of commencement of commercial operation (DCCO) could be extended without changing asset classification status PROBLEM: Banks taking upfront loss on equity while debt-to-equity conversion as share price of a stressed borrower was often not in line with its intrinsic value PRESCRIPTION: In talks with Sebi for waiver of Substantial Acquisition of Shares and Takeovers (SAST) regulation; guidelines in three months |
PROBLEM: Muted sale of bad loans to asset reconstruction companies
PRESCRIPTION: Banks are allowed on a retrospective basis to reverse excess provision on sale of NPAs, where the cash received is higher than the net book value of the asset
T M Bhasin, chairman and managing director of Indian Bank, and chairman of Indian Banks’ Association said the relaxation pertaining to DCCO may also encourage banks to push for a change in management if they sense risk in the project due to a promoter’s inefficiencies.
Chanda Kochhar, managing director and chief executive officer of ICICI Bank, said the flexibility regarding the DCCO will enthuse companies with strong balance sheets to consider taking over stuck projects.
The relaxation from the stigma of restructured asset in such cases will also help such mothballed companies to raise money from abroad — which will be a new avenue open to them and may reduce the exposure of Indian banks to such companies.
Prabal Banerjee, president — international finance, Essar Services said: “Such takeovers may not be entirely in the form of M&A, but will be hand over formalities in the form of slump sale — since share sale can’t be bank financed in our country.”
Senior public sector bank executives said lenders to Vijay Mallya-promoted Kingfisher Airlines, now a defunct entity, were hit badly. The price fixed to convert loans into equity was much higher than the price of stock in the market as part of the restructuring package. The package failed as the airline never worked well even after getting the lease of life. Result was banks had to make extra provision for erosion in the value of Kingfisher shares.
RBI made clear its intent to end the regulatory dispensation for restructured assets by March 2015. From April 2015, restructuring will no longer enjoy the benefit of lower provisioning.
“In order to build confidence in bank balance sheets we have to come to an end to forbearance, we have to put banks on the right track. We have given enormous amount of flexibility in trying to put distress projects on track” RBI Governor Raghuram Rajan said.
RBI also extended benefit of writeback provisions made by banks on sale of NPAs to asset reconstruction companies prior to February 2014. This will reduce the provision requirements of banks and inject cash to the capital-starved banks.
