BackSBI, ICICI, Axis Bank lead push for strategic debt restructuring
To help banks with the process of reducing their stressed assets, RBI introduced the SDR rules in June
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Mumbai: Lanco Infratech Ltd’s lenders had had enough. The infrastructure company had made plenty of promises during its debt-restructuring negotiations with banks in 2013 as it sought to recast about ₹ 7,000 crore in loans. A year and a half later, only a few of those promises had been honoured.
Asset sales were far too few and the slower-than-expected economic recovery meant that the stress on Lanco’s balance sheet showed no signs of easing.
The company has a total debt of ₹ 34,000 crore and lenders were running out of patience, said two people involved in the negotiations, requesting anonymity. The banks felt that some tough decisions were in order.
“Somewhere in July, the lending consortium led by ICICI Bank (Ltd) met and discussed the possibility of asking the promoters to take a backseat as lenders took charge of negotiations around the sale of some assets," said one of the two people cited above.
The time when borrowers could have their say had passed, the second person cited above said.
It wasn’t an easy proposition to sell, particularly to a family-led business. Multiple meetings followed.
Finally on 10 August, Lanco Infratech told the stock exchanges that a consortium of nine lenders had decided to invoke the Reserve Bank of India’s (RBI) strategic debt restructuring (SDR) route and had chosen to convert a majority of their debt into equity in Lanco Teesta Hydro Power, with the aim of selling it to a suitable buyer. Lanco Teesta is in the process of setting up a 500 megawatts (MW) hydropower plant on the banks of river Teesta in Sikkim. Loans worth about ₹ 2,200 crore were at stake.
Lanco said that the negotiations with the lenders for selling the asset were, in fact, initiated by it.
“Due to adverse macroeconomic conditions, there were multiple cost overruns in our projects. Due to this, we were already in the process of finding strategic partners. However, the environment was such that buyers were not easy to come by. Hence, we were the ones who initiated the discussions with the lenders," said A. Narasimhan, executive director of corporate communications, Lanco Group.
Last Monday, executive chairman L. Madhusudhan Rao said Lanco has postponed asset sales by at least two years because of low valuations for power assets.
The Lanco case is representative of the push from three top lenders—State Bank of India (SBI), ICICI Bank and Axis Bank Ltd—to use the recently announced SDR rules as effectively as possible as they seek to clean up their own balance sheets.
An extended economic slowdown and stalling of infrastructure projects have pushed stressed assets (which include bad loans and restructured assets) to 11.1% of total advances as of 31 March, according to RBI’s financial stability report released in June. To help banks with the process of reducing their stressed assets, RBI introduced the SDR rules in June, allowing banks to take over these assets by converting their debt into a majority equity stake.
Since June, these rules have been invoked in at least five companies—Electrosteel Steels Ltd, Visa Steel Ltd, Jyoti Structures Ltd, Monnet Ispat and Power Ltd and Lanco Teesta. Lenders are also pushing to convert a major part of their debt to equity in road developer IVRCL Ltd, Mint reported on 29 September.
“Most of these sales and cases of SDR are being pushed by SBI, ICICI Bank and Axis Bank. Most other lenders are only now becoming aware of the power they wield," the first person said.
Official spokespersons for ICICI Bank and Axis Bank did not respond to queries and requests for meetings sent last Monday.
Pradeep Kumar, managing director of corporate banking at SBI, declined to comment on any specific cases, but said that it is up to the large lenders to do what they can to stabilize companies where they feel they can.
According to Kumar, the slow recovery in macroeconomic conditions and the difficult business environment sometimes lead to borrowers losing all hope. That is when lenders need to do what they can to help stabilize the company and recover their investments.
“The main problems are with borrowers who are not always up for an SDR solution. We have to make them understand that this is the only possible route for the company to survive," said Kumar.
A banker with one of the private banks named above said that lenders are pushing for asset sales in cases where they feel the company can be eventually revived.
“The reason we are pushing for SDR and asset sales is that we are confident of finding new buyers and turning the case around. Only when we thoroughly believe that recovery is a real possibility do we encourage borrowers to go for these things. Else, we are not against liquidation either," said the banker, requesting anonymity because of the sensitivity of the issue.
A look at the corporate loan exposures on the books of these three lenders explains the reason behind their sense of urgency in dealing with stressed assets.
The three lenders put together account for nearly ₹ 7 trillion of the ₹ 40.6 trillion worth of corporate loans outstanding across the entire banking system. At SBI, overall gross non-performing assets (NPAs) were at 4.29% as of end-June against 4.25% in March. For ICICI Bank and Axis Bank, gross NPAs were at 3.68% and 1.38%, respectively, at the end of the June quarter.
Bankers say that while the SDR rules have empowered lenders to convert loans to equity as one way of resolving stress, the process is far from easy. The slow judicial system comes back to haunt banks as they try and execute the decision to invoke these rules.
In the five cases where SDR proceedings have been initiated, lenders are yet to convert their debt and finally take control of the management. Once that procedure is complete, lenders will have 18 months to stabilize operations and find a suitable buyer to sell the controlling stake to.
“It is essential to find a buyer only after the distress situation has been brought under control. Else it would turn to a distress sale and we wouldn’t get a reasonable valuation for the equity," said the private sector banker cited above.
Not everyone is convinced that it will be easy to find buyers easily even as the end of the 18-month period.
“So far, the attitude that a large number of lenders have is to avoid an NPA tag on a large exposure. They seem to not realize that 18 months is actually a very short period of time to get a deal in place," said one of the two people cited above, a consultant who requested anonymity due to the confidential nature of such discussions.
According to RBI norms, if the bank holding is not sold to a new promoter at the end of the 18-month period, the asset will go back to being an NPA.
“There are some crucial questions we need to ask when discussing the SDR provision. If in the 18-month interim period, the present management loses interest and banks refuse to give additional funding, you can imagine the kind of asset erosion that could happen. It will be the new buyer and the banks who would be finally burdened with the losses," said Nirmal Gangwal, managing director, Brescon Corporate Advisors.
According to Gangwal, only a few of the cases up for change in management have a chance of a successful transfer of control at a good price. “Banks will have to take a hit in all other cases," he said.
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