Banks create six groups to try to revive stalled projects4 min read . Updated: 04 Sep 2015, 02:21 AM IST
Groups to separately evaluate troubles faced by sectors including steel, construction, power, roads and ports
Mumbai: The country’s top lenders, including public and private banks and infrastructure finance companies, have created six sectoral groups to review and find ways to kick-start 282 stalled and troubled projects. The groups will separately evaluate troubles faced by sectors such as steel, construction, power, electricity distribution, roads and ports, along with EPC (engineering, procurement, construction) contractors.
The country’s lenders, already saddled with a stack of bad loans, have considerable exposure to these segments and are trying to ensure that loans given to companies to these stressed sectors don’t add to the problem. According to Reserve Bank of India (RBI) data on bad debt, as on 31 March 2014, about 36% of the overall 4.1% bad assets in the system were linked to six sectors of the economy—infrastructure, metals, textiles, chemicals, engineering and mining. These sectors account for about 30% of outstanding credit.
While the government, through its project monitoring group (PMG), has been trying to find solutions to stalled projects in some these sectors, bankers are hoping to play an advisory role and suggest more sector-specific turnaround ideas.
The lenders will largely act as agents of the government and the PMG of the cabinet secretariat, said banking sources familiar with the matter. Banks will work closely with promoters of various projects and will recommend the way forward to various ministries, regulators and other authorities in resolving issues being faced in speedy implementation of the projects, said two bankers directly familiar with the matter.
The Indian Banks’ Association (IBA), the apex bankers’ lobby, will be in charge of these review groups. An IBA official confirmed this.
“This is not a joint lenders’ forum or corporate debt restructuring mechanism; banks cannot take any decision in these groups," said a third official aware of the plans.
The six groups so far have had one meeting in the first half of August. Going forward, these groups are expected to meet separately on their chosen sectors.
The creation of the groups was first mooted in April when financial services secretary Hasmukh Adhia and R.N. Choubey, special secretary, power, met top bankers, IBA officials and RBI officials to discuss ways to help 85 large projects worth about ₹ 3.5 trillion. About 4% of these projects were marked as bad debt at the time.
“The immediate requirement is to get the road and power sectors on track to gear-up the economy and smoothen stress in the balance sheets of banks in India. Reviving the road sector will enliven the cement industry, steel industry and various allied and auxiliary industries," said Navin Kumar Jain of Jainco Corporate Advisors Pvt. Ltd, adding that the revival of the power sector will have a similar positive spillover.
“...formation of sectoral groups to individually address the issues in each infrastructure sector is expected to yield desired results provided corrective action plan is enacted as early as possible," said Jain.
In the absence of fresh investments, restarting stalled projects is being seen as one way to revive the investment cycle in the economy. Resolution of these stalled projects is critical for banks, who have extended loans to some of these projects, as they try and bring down the level of bad debt on their books.
According to RBI’s 27 August annual report, the PMG has received proposals for 675 projects with an estimated project cost of ₹ 28.8 trillion for its consideration.
“Out of these, 291 projects worth ₹ 9.9 trillion were cleared by the PMG with the majority of projects pertaining to the power sector, followed by coal, road and petroleum sectors. However, the impact of government initiatives is yet to be felt in terms of the revival of central sector infrastructure projects ( ₹ 1.5 billion and above) monitored by the ministry of statistics and programme implementation (MoSPI)," the annual report said.
As on May 2015, of the 766 projects under implementation, 237 projects worth ₹ 4.83 trillion were delayed, showed data in the RBI’s annual report sourced from MoSPI.
According to Santosh Nayar, managing director and chief executive officer of infrastructure lender IFCI Ltd, a member of the groups formed, stalled projects are not coming back onstream fast enough and lenders have to be more proactive.
State Bank of India’s managing director and group executive of corporate banking P. Pradeep Kumar, however, was hopeful that the six groups formed by banks will help.
“Let’s hope something positive will come out of it. We have met only once so far," he said.
The groups add more credibility to the cases in urgent need of care, said Seshagiri Rao, group chief financial officer, JSW Steel Ltd, India’s third largest steel maker.
“When a stressed company is approaching the government, it is always perceived as biased. But when there is a third party with credibility that approaches the government, it makes a difference. Also, a third party, that too a lender, will take a compassionate view on the matter," Rao said, adding that these suggestions can then be examined further by the government.
Not everyone is convinced that more deliberations will help.
“All these sectors have been ailing for a long time and every one knows the problems and probably some solutions. Adequate diagnosis has been done, and there is nothing to discover either at the sector level or at project level," said A. Subbarao, group chief financial officer (CFO) of RPG Enterprises and formerly CFO at GMR Group.
“Probably they want to be seen as doing something rather than forcing the implementation of the known solutions," Subbarao added.
A senior banker who did not want to be named agreed that there is little the banks can do unless the government clears hurdles faced by these projects.