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Loan recasts to get tougher for companies

Loan recasts to get tougher for companies

Mumbai: Over-leveraged Indian companies will no longer be able to arm-twist banks to restructure their loans, if the Reserve Bank of India (RBI) accepts the proposals of an expert panel.

Burdened with piling bad assets, Indian banks have been restructuring loans as they also get benefit out of such an exercise. Under existing norms, banks need to set aside money for bad loans and that affects their profitability. In contrast, if a loan is restructured before it turns bad, banks do not need to make any provision.

“Clearly, there have been instances of some wilful defaults among companies," said Ashvin Parekh, a partner at consulting firm Ernst and Young India. “This is a good attempt to weed them out from misusing the banking system."

“I understand when someone is in genuine need for assistance. But how would you explain if there is no cash loss and companies (are) putting pressure on banks to restructure loans after they are in trouble due to excess leveraging and unrealistic expansion plans," asked the head of a state-run bank who did not want to be named.

Earlier this month, an RBI panel, headed by executive director B. Mahapatra, proposed stricter norms to exclude those cases from tapping banks for restructuring where the promoters are not willing to put some “skin in the game".

The panel sought that promoters should contribute a “minimum 15% to the diminution in the fair value of restructured assets, or 2% of the restructured debt, whichever is higher".

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RBI could soon adopt norms that would make it difficult for companies to coerce banks into restructuring their loans. Mint’s Dinesh Unnikrishnan explains.

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Personal guarantees should be made mandatory in all cases of restructuring and banks should convert loans into preference shares or equity shares “only as (a) last resort", the panel said.

Such conversions should be capped at 10% of the restructured assets, and converting loans into equity should be allowed in the case of listed firms, the panel said.

“This will make the rules of the game more balanced for both banks and companies," said S. Raman, chairman and managing director of Canara Bank. “The proposals are in right direction for the system."

More importantly, the RBI panel suggested to do away with regulatory forbearance regarding asset classification and provisioning in two years. If indeed that happens, banks have to make provisions for anywhere between 5% and 15% for any loan the moment it gets restructured.

Currently, banks need to make a 2% provision on standard assets that they restructure, and a provision of up to 15% if the restructured loans turn bad. The provision requirement on restructured accounts should be increased to 5%, the panel said.

RBI has sought feedback to the Mahapatra panel proposals until 21 August.

The current cycle of loan recasts began in 2008 following the global financial meltdown that broke out following the collapse of US investment bank Lehman Brothers. The ripple effect of the crisis hit Indian industries, especially the export-oriented ones. Since then, banks have increasingly restructured loans of companies across sectors.

About 40,000 crore of bank debt given to distressed firms was approved for recast under the corporate debt restructuring (CDR) route in the fiscal ended March. Under CDR, banks extend the repayment period of stressed borrowers, cut interest rates and sometimes even take a haircut.

On a cumulative basis, banks have approved debt worth 1.5 trillion for recast through the CDR cell as of 31 March. A year ago, the cumulative debt figure was 1.11 trillion. These figures does not reflect the entire loan recasts as, besides CDR, banks also undertake bilateral restructuring with companies in sectors such as textiles, real estate, aviation and microfinance.

“The so-called misuse of loan restructuring facility is happening with the connivance of some bank officials," said Anand Gupta, honorary general secretary of Builders Association of India, which has around 5,500 real estate developers as members. “Even when we approach banks with genuine restructuring because of project delays due to lack of clearances, they do not approve, citing various norms," Gupta said.

H.M. Bangur, managing director at Shree Cement Ltd, said: “Some companies have been misusing the loan recast facility...the banking industry should be able to recover loans even if it is by converting loans to equity."

Analysts said a section of companies have been tapping banks to avail loan recasts without genuine reasons. They cautioned that 20-25% of restructured loans are likely to turn bad over the next one to two years and banks need to exercise extreme caution while admitting proposals for loan recast going ahead.

Avinash Gupta, head of financial advisory at Deloitte Touche Tohmatsu India Pvt. Ltd, said tightening of rules could make firms more cautious while seeking debt recast. “The new norms should bring more cautiousness. In terms of returns, banks just get the interest amount above the principal. If the loan turns bad, their entire exposure will be at stake," Gupta said.

Vaibhav Agarwal, an analyst at Angel Broking Ltd, said increased commitment from promoters in restructured assets will lessen the risks of banks. “There could have been some amount of misuse. Though, overall, it is very difficult to establish as to which are those cases. One should expect about 20-25% of the restructured assets to turn bad in the near term—say one to two years," he said.


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