 "Banks eye 'resolution' of Rs 1.5 lakh cr worth stressed assets")
Enthused by speedy recovery of loans worth $2.5 billion by three lenders including ICICI Bank within days of mega $13-billion Essar deal, banks are now looking at resolution of stressed assets totalling Rs 1.25-1.50 lakh crore (nearly $20 billion) in coming months.
Having broadly completed the first two stages of 'recognising' the stressed assets and of 'reserving' or provisioning for such loans in their accounts, the banks are now betting big on 'resolution' part of what is being billed by some top bankers as '3Rs' formula to recover their dues.
With the Essar deal coming in as a major catalyst, the banks are prioritising the resolution process by focussing on helping in sale of businesses by corporate borrowers and by converting debt into equity at operating profit-generating companies, according to some top bankers.
Without naming the companies where such deals are in the advanced stages, the bankers said those involved in manufacturing sector stand a good chance of attracting suitors — mostly from abroad and some cash-rich enterprises from within the country with strategic interest in the respective business areas.
Among foreign companies, those from Russia, Canada and Gulf countries are expected to buyout assets in a big way, while a few domestic conglomerates are also looking at strategic buyouts of assets from debt-ridden groups.
As per industry estimates, the banks have classified loans totalling Rs 1.25-1.5 lakh crore as 'stressed assets' that can be recovered faster through various 'resolution' methods like sale of assets, transfer to ARCs and RBI-provided tools like SDR (Strategic Debt Restructuring) and S4A where debt can be converted into equity while allowing existing promoters to run the businesses where operating profit is being generated.
The 'resolution' process has got a major boost after three top lenders — ICICI Bank, Axis Bank and StanChart — got back an estimated $2.5 billion last Friday as part of the first payment for their debt exposure to the Ruias-led Essar Group.
The two Indian lenders — which together had an exposure of $1.5 billion — will get back nearly half of their money or about $770 million in cash, while further $750 million of debt will get transferred to Rosneft-led consortium and to Essar's ports and other businesses, as per the terms agreed upon by them.
Out of the total cash component, nearly $350 million was paid in cash to the two Indian banks last Friday, which together with interest payout of about $100 million, takes their total collection from Essar to about $450 million, banking sources said. ICICI Bank's share in the total payout is three-fourth, while the remainder is of Axis.
The transferred loans would be backed by sufficient collaterals, while the Indian lenders' decision to opt for only half cash component showed their confidence in Rosneft's commitment to the India growth story and in the future prospects of ports and other infrastructure sectors.
This along with a few earlier deals like those involving Jaypee Group and Gammon have given a major boost to the entire resolution process by helping the focus move beyond 'recognising' the stressed assets and reserving for them.
"Earlier, it was said that banks are not recognising the bad loans. Then they were asked to make provisions for such assets, but the required focus remained missing from the resolution process even as heroes were made out of recognition and reservation processes," a top banker said.
"While the first two "Rs" were basically in the regulators and the auditors' domain, what matters the most is the resolution part as the banks eventually need to get their money back for the overall benefit of the economy and every stakeholder which includes the government (in case of public sector banks), foreign investors, individuals and various fund houses," he said, while stressing on the need for a change in mindset for a faster and effective resolution mechanism.
"The successes we have had in some recent deals would ensure that the resolution of stressed assets would get the due attention and we may finally have some heroes out of the resolvers," the banker said, while adding that the banks will need to work with various stakeholders including promoters for this.
Among various resolution buckets available with the banks, ARCs or Asset Reconstruction Companies provide an intermediate avenue as transfer of loans may provide only an accounting cushion, but the entry of some large players including from abroad (Brookfield from Canada being one) in this area can give a major boost.
The second most importation resolution bucket, as per bankers, is going to be sale of assets as there is a good demand for 'hard assets' like plants in sectors like cement, steel and power, that have been made unviable in view of adverse commodity cycle and huge debt levels of current promoters.
However, these plants can eventually turnaround with revival in commodity cycle and with the entry of new owners with good cash, who may prefer operating assets as compared to creation of new plants that would require multiple approvals while changed forex market scenario would make investments costlier for setting up new facilities.
However, the problem areas include 'soft assets' in areas like construction where no outstanding projects have been created and the new owner might not find something worthwhile on table that itself cannot be created from scratch.
Bankers said that the buyers would 'cut and slice' the assets as they might be interested only in areas of their strategic interest, as has been the case in deals involving Jaypee and Essar.
The domestic interest is expected to be relatively limited as many of the large corporate houses are already highly-leveraged and only a few have good cash reserves.
The domestic interest is expected to be relatively limited as many of the large corporate houses are already highly-leveraged and only a few have good cash reserves.
"Foreign interest is expected to be huge, especially with the government focus on ease of doing business and many more deals involving overseas players should suffice soon," a senior private sector banker said, while listing out Canadians, Russians and Gulf companies (who have lot of oil dollars and looking to expand into new areas) among those most likely to buy assets in India.
"Money is not a problem for them and the dollar-rupee rate gives them an extra advantage to sign more Rosneft-Essar like deals. These deals should act as initial catalysts for many more to come," he said.
However, the US companies may mostly focus on technology side while funds may also come from there in form of foreign portfolio investments as their manufacturing and 'hard asset' focus is currently on domestic market.
Regarding the RBI tools like SDRs and S4A, the bankers expect most action in sectors like steel and construction, where banks can go for debt-to-equity conversion by allowing existing promoters to run the businesses that are generating operating profit.
In the largest inflow of foreign direct investment, Russia's state-controlled oil giant Rosneft and its partners on October 15 acquired Essar Oil, India's second biggest private oil firm, in an all-cash deal valued at about $13 billion.
Rosneft has bought a 49 per cent stake in Essar Oil's refinery, port and petrol pumps, while Netherlands-based Trafigura Group Pte, one of the world's biggest commodity trading companies, and Russian investment fund United Capital Partners split another 49 per cent equity equally.
The remaining 2 per cent will be held by minority shareholders after delisting of Essar Oil.
Essar group had said it would utilise significant portion of the deal proceeds for debt reduction and expected the group debt to come down by about 50 per cent.
Essar Group, one of India's largest but among the most-indebted conglomerates, had total debt of about Rs 88,000 crore (over $13 billion).
