Mumbai: Reserve Bank of India (RBI) deputy governor Viral Acharya on Tuesday floated two proposals to restructure stressed debt in troubled sectors.
In his first public speech after taking charge on 23 January, the NYU-Stern professor said in cases where there is economic value in the short run, banks could consider a private asset management company (PAMC) structure, with a moderate level of debt forgiveness.
Under this plan, banks may be asked to resolve 50 of the most stressed cases by 31 December, with turnaround specialists and private investors called upon to assess the cases. The latter will submit a resolution plan, marking out sustainable debt and debt-for-equity conversions for banks to facilitate the issuance of new equity, and possibly some new debt, to fund investment needs.
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“We may have to consider that the sustainable portion of bank debt does not have to be greater than some minimum amount, so as to allow for a large haircut if necessary for economic recovery of the asset,” Acharya said.
Acharya’s comments come against the backdrop of banks’ inability to shake off bad debts totalling at least Rs6.5 trillion, despite schemes such as sustainable structuring of stressed assets (S4A) and strategic debt restructuring (SDR).
Under S4A, banks can classify only a maximum of 50% of a stressed firm’s debt as unsustainable. Banks have been lobbying for a lower threshold.
Under Acharya’s PAMC plan, the case must be rated by at least two credit rating agencies to assess the financial health, economic health and management quality (promoter or the new team). The rating would be for the asset and not just for bank debt in case additional debt is issued under the plan, Acharya said.
Feasible plans would be those where there is a real chance of these assets turning around and the rating improving. Banks will choose the most acceptable feasible plan, with a two-thirds majority, and then implement it. Promoters will have no say in the matter.
“At expiration of the timeline, each exposure that is not resolved will be subject to a steep sector-based haircut for the bank consortium, possibly close to 100%. The promoter will automatically have to leave. These assets would be put into our new Insolvency and Bankruptcy Code regime,” Acharya said.
In cases of assets where there is little to no economic value in the medium or short term, Acharya suggested a national asset management company.
Such an entity would raise debt for its financing needs; possibly raise some more to pay off banks at a haircut, (likely steep but softened by payment in the form of security receipts against the asset’s cash flows); keep a minority equity stake for the government; and, bring in asset managers such as ARCs and private equity to manage and turn around the assets, individually or as a portfolio.
While discussing the possibility of implementing these resolution plans, Acharya clarified that these would not be so-called bad banks.
“Resolution agencies set up as banks that originate or guarantee lending have ended up being future reckless lenders, notably in the case of Germany which has often aggregated stressed assets of its Landesbanken into bad banks,” he said.