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Mumbai: Indian lenders, who are pushing indebted firms to sell assets as they try and reduce the stress on their balance sheets, may only see temporary relief unless borrowers are persuaded to restructure their businesses to make them more sustainable.

Proceeds from sale of assets are enough to only cover interest payments for a few quarters, after which the borrowers may struggle again, say bankers.

“The sale of some assets and transfer of ownership of some parts of land will only cover the interest payment for a year or so. This would mean that in about a year, companies and banks may face similar issues to what they are facing now," said a senior banker at a state-owned lender that is part of joint lender forums (JLFs) for many companies.

“At that time, we won’t have that many asset sales to push for," he cautioned, speaking on the condition of anonymity.

For example, Bhushan Steel Ltd, with a total debt of over 40,000 crore, has recently sold an oxygen plant at its integrated steel plant Odisha for 1,000 crore and leased it back.

It is also looking to sell and lease-back a coke oven plant for 2,000 crore, Mint reported on 22 April.

Even at an interest rate of 11% (the average borrowing cost ranges from 11-14%) annually, the funds generated from the asset sales are good to cover interest cost for around a year.

The sales so far will not help the company repay the principal on the debt, which in turn would have helped reduce the monthly outgo towards repayment of dues.

In the interim, the company continues to struggle with weak steel price realizations and low capacity utilization (both are industry-wide problems).

Lenders have asked the company’s promoters to consider bringing in a strategic investor who can infuse some equity to balance Bhushan Steel’s debt-equity ratio. That is yet to happen.

In the case of the Jaypee Group, the group has sold about 26,000 crore worth of assets in the last 24 months. It has also transferred the ownership of some land in lieu of debt. While the asset sales will help regularize interest payments and keep the account as a standard account, the company will have to restructure its operations to ensure that the remaining assets generate enough cash flow to offset loss of earnings from the units that have been sold. The group has now called for consultants to help with an operational restructuring to reduce its indebtedness.

The Jaypee Group had 75,000 crore outstanding debt as on 31 March 2015, according to Credit Suisse AG’s House of Debt report released in October. This is the latest number available for the consolidated debt of the group.

“Banks have been largely incapable of finding a reasonably long-term solution for all these problems and may have to look at others to come to their aid," said another banker at a state-owned bank, also on condition of anonymity.

According to the second banker, the sale of loans to special situation funds and asset reconstruction companies (ARCs) might be the best way forward.

“The system will push for such sales aggressively in the second half of this financial year," he added.

Analysts believe that with cash-flow generating assets being sold off, some heavily indebted companies might be worse off than before, although this would not be true for all.

“A single strategy of deleveraging and waiting for the tide to turn may not work when you are dealing with various industries. In case of power companies, as things have started to look up due to the government’s efforts, lenders may want to wait. However, in steel firms, banks will be forced to take a haircut and sell to other investors, said Vibha Batra, group head, financial sector ratings, Icra Ltd.

“Over the next year or two, we will see a variety of such deals emerge and that will determine the overall asset quality of the banking sector," she added.

Lenders are looking to act fast as the Reserve Bank of India has set a March 2017 deadline for banks to clean up their books by recognizing and providing for stressed assets.

This has led to a jump in gross bad loans across India’s 39 listed banks that have surged to 4.38 trillion for the quarter ended 31 December from 3.4 trillion at the end of September, shows data collated by Capitaline, a financial database. A majority of these bad loans have come from the corporate sector, where credit quality continues to remain weak.

To keep a check on a further build-up of bad loans and the consequent provisioning requirements, banks have pushed firms to sell assets.

Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services Llp., says that banks are justified in their approach and adds that debt reduction and a long-term turnaround plan are both essential.

“When we are looking at the economic scenario we are in, an intent to repay the banking system’s debt and the borrower’s ability to turn around the remaining assets after the deleveraging exercise are both important. If the viability of the remaining assets has been established (subject to restructuring and a revival in the economy), banks may want to support whatever asset sales are happening and recoup part of their loans. However, the judgement will have to be taken after carefully evaluating the opportunities in hand and how capable the borrower is at using them," said Parekh.

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