A front-page item in the June 14 edition of this newspaper ("Infrastructure companies' debt woes worsen") indicates that the debt burden of several Indian infrastructure companies has risen to unserviceable proportions. Contrary to expectations, public sector undertakings such as NTPC and Power Grid Corporation are financially healthier, with considerably lower debt-equity and higher interest-coverage ratios, than some private sector companies such as Jaiprakash Associates, Adani Power, GVK Power and Infrastructure, GMR Infrastructure and Lanco Infratech. Currently, the government's and the Reserve Bank of India (RBI)'s attention is focused on the extent to which debt-laden Indian firms need financial assistance and the consequent risk capital requirements of the banking sector. Public sector banks (PSBs) have higher levels of stressed assets than private banks, as they are more susceptible to pressures from government to lend for long-gestation infrastructure projects.
On July 15, 2014, the RBI issued a notification titled "Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries", which has come to be known as the 5:25 year scheme. This order appears to be designed to allow banks to revise the terms of long-term loans every five years over a 25-year period without having them classified as restructured. CRISIL has warned that about Rs 50,000 crore worth of infrastructure loans disbursed under this 5:25 arrangement would need lending terms to be further softened.
Although infrastructure development is needed, side-stepping of credit risk considerations on long-term loans ends badly for banks. No governmental or regulatory magic can make credit risk disappear. Financial engineering can at best slice risk and package it such that lenders can manage it better.
With this as the backdrop, the RBI followed up on its February 16, 2014, "Framework for Revitalising Distressed Assets in the Economy - Guidelines on Joint Lenders' Forum (JLF) and Corrective Action Plan (CAP)" with a notification dated June 8 this year and titled "Strategic Debt Restructuring Scheme" (SDR). It is farcical that the RBI felt the need to state a universally accepted basic banking norm in this order that the "general principle of restructuring should be that the shareholders bear the first loss rather than the debt holders".
The RBI's June 2015 SDR notification allows banks to take over 51 per cent or more of promoter equity within 30 days of reviewing a company's accounts. Of course, banks are urged to offload such equity stakes quickly since they do not have the expertise to manage the companies they take over. It is likely that takeover of companies under the RBI's SDR would be challenged in courts. For this and several other reasons, the government's intention to get a new bankruptcy code enacted - as announced in this year's Budget speech - should be implemented urgently.
The right to recompense for lending institutions should include interest or principal waived in the past. That is, restructuring agreements should require that if and when a company or related companies regain financial viability, they make good on the debt repayments that were foregone earlier. If the legal position on such rights for lenders is unclear, this should be included in the proposed bankruptcy code.
At the end of March 2015, total non-performing assets (NPAs) of PSBs were 5.2 per cent of disbursed loans and their stressed-assets ratio stood at 13.2 per cent - that is, around Rs 7 lakh crore. The total proportion of stressed assets, including private sector banks, is around 10 per cent. According to corporate debt restructuring (CDR) cells of banks, about 300 companies are looking to reschedule debt totalling Rs 3 lakh crore. For instance, Bhushan Steel is seeking extensions in the maturities of debt amounting to Rs 35,000 crore and banks have rescheduled Rs 7,500 crore of debt owed by Anil Ambani group's Pipavav Defence and Offshore Engineering. Separately, Mukesh Ambani-promoted Reliance Gas Transportation Infrastructure has refinanced debt amounting to Rs 16,000 crore, with repayments stretched out to 2030.
In the past 12 months, stock prices of companies overladen with debt, for example, Unitech, Jaypee Infratech, Jaiprakash Power Ventures, DLF and GTL, have fallen significantly, reflecting doubts about the ability of these companies to service their debt. And Essar Steel's Joint Lenders Forum is finding it difficult to reach consensus to recover about Rs 12,000 crore owed to them.
Taking a step back, Indian sponsors starting with relatively low levels of equity capital often invest across four or more companies. Debt is contracted for the balance-sheet needs of these four companies - and, say, three out of the four companies go bust. It is possible that one out of this group of four companies ends up doing well. The owners then default on loans for the first three companies, resulting in higher NPA levels all around, since banks cannot acquire assets of the fourth company, which is profitable.
The RBI's "Master Circular on Wilful Defaulters" of January 7, 2015, and notification on "Collection and Dissemination of Information on Wilful Defaulters" of April 23 provide enough wriggle room for large borrowers to make complex legal arguments that default was not wilful. Banking regulators in developed countries do not use such measures since in their jurisdictions there are comprehensive bankruptcy laws. Anecdotal evidence suggests that the RBI has resorted to this wilful defaulter mechanism because of the interminable delays in Indian debt recovery tribunals and corresponding appellate tribunals. In practice, some smaller firms end up getting terrorised by this wilful defaulter label. On balance, this distinction between wilful and other defaults should be abolished.
PSBs have to share the blame, too, because they usually delay decisions on debt rescheduling requests, converting manageable liquidity issues into solvency problems. Banks should be made accountable to respond to debt restructuring requests in a time-bound manner. If banks allow rescheduling, it should clarify that debt servicing delay was based on risks the borrower could not have anticipated.
To sum up, taxpayers can legitimately demand, as the ultimate lenders of last resort, that the RBI instruct banks to list on their websites estimates of the face and present value of debt that has been restructured. Such disclosures for borrowings with at least Rs 1,000 crore as principal should have a salutary impact on borrower and lender behaviour. The RBI should provide readily accessible summary information on its website about all corporate debt defaulters and the amounts involved. If there are any legal infirmities or ambiguities to providing such information, this should again be rectified in the proposed bankruptcy code.
The writer is the RBI Chair Professor in Icrier
j.bhagwati@gmail.com
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