 "Outside RBI Headquarters in Mumbai.? Photo: Kamlesh Pednekar")
In a surprise move, the Reserve Bank of India (RBI) has trimmed the list of companies whose loans need to be provided for by banks in their books as bad loans. The markets have naturally taken the news positively which reflected in the Bank Nifty rising by nearly 2%.
Reports say that RBI has dropped 20 companies, including Jaiprakash Associates and Coastal Energen, from the list of 150 firms that were earlier flagged by RBI asking banks to make provisions for these accounts.
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Banks have been trying to hide their non-performing assets (NPA) by ever-greening their stressed accounts, especially the bigger ones. Banks used to lend these companies money either as a short term loan or any other form of lending which the companies used to give it back to the banks as their payment for the original loans so that their accounts were not declared NPAs. In the case of consortium funding, some corporates would borrow from one bank and use it to repay loan of another.
RBI saw through this and ordered banks to start making provisions for 150 accounts, many of whom fell in the above-mentioned categories. Some of the companies were on the list for technical reasons such as not having pledged shares or not complying with the terms of restructuring. Analysts estimated that nearly Rs 70,000 crore of bank loans are vulnerable on account of RBI’s guidelines.
It is reported that Jaiprakash Associates has taken steps to bring its debt down by selling its assets (the company has already sold its cement business). It is not known what steps the others have taken to be able to exit the list.
While banking stocks have moved higher on the assumption that provisioning by banks would be lower during the current quarter as the list has shortened, the real reason to be happy is that corporates have realised that they will have to pay and comply with the law of the land. The aggressive stance taken by the court, RBI and government in handling the Vijay Mallya issue has also sent strong signals to other ‘wilful’ defaulter to pay up.
Companies who kept extending their repayment schedule have now resorted to asset sales to pay bankers. In fact some others have sold their assets only to lease it back in order to free some cash to repay the bankers. Bhushan Steel has sold its oxygen plant and coke oven units and leased it back to pare its debt.
RBI, however, is not comfortable with the sale-and-lease back model as it feels rental payments will add further stress on a company’s operations.
Other companies are selling equity stakes or units in order to repay banks. Recognising these genuine efforts, the central bank has decided to remove companies who have taken such steps to cut their debt.
The carrot-and-stick approach has started yielding results. The fear among corporates of paying the banks back or risking imprisonment is the real reason which should be celebrated. This will ensure a healthier balance sheet in the long run.
The message that RBI has sent by removing some companies from the list is that it is watching the developments like a hawk and that it means business. Chances are that the 130 pending companies in the list would now accelerate their effort to come out of it. This is a valid reason to celebrate.
