Banks Want a New Debt Re­cast Scheme to Deal with Bad Loans

With cur­rent schemes not de­liv­er­ing, they will sub­mit a plan seek­ing big changes to the process

The Economic Times - - Companies: Pursuit Of Profit - Su­gata.Ghosh@ times­group.com

Mumbai: A mountain of sticky loans stare at them. Past lend­ing de­ci­sions have put a few of their col­leagues be­hind bars. And, none of the fancy schemes — which once ap­peared promis­ing — have taken off in a mean­ing­ful way to re­cover bad loans and re­vive dis­tressed bor­row­ers.

Grap­pling with th­ese stark re­al­i­ties, the coun­try’s top bankers met a week ago to dis­cuss the pos­si­bil­ity of a deep — and per­haps a more re­al­is­tic — loan re­jig pro­gramme that would re­tain the ex­ist­ing man­age­ment of a de­fault­ing com­pany, con­vert a sub­stan­tial part of ir­reg­u­lar debt into stocks, and min­imise pro­moter con­tri­bu­tion.

“Banks are in the process of sub­mit­ting their pro­posal to the Re­serve Bank of In­dia... it will need reg­u­la­tory sanc­tion as the rules of the old cor­po­rate debt re­struc­tur­ing (CDR) mech­a­nism as laid down by RBI will have to be changed for this,” a se­nior of­fi­cial of a large bank told ET.

NEW PLAN

In case of com­pa­nies which un­dergo a change of pro­moter and man­age­ment, some banks have fur­ther sug­gested that a com­mit­tee com­pris­ing ex­ter­nal con­sul­tants, se­nior lawyers, and bankers should be con­sti­tuted to eval­u­ate the bids from busi­ness groups that are in­ter­ested to ac­quire the stake and run a trou­bled com­pany. Un­der the present CDR scheme — which resched­ules loans to give de­fault­ing com­pa­nies a longer and ea- sier re­pay­ment chance — not more than 10% of the out­stand­ing debt can be con­verted into eq­uity. More­over, pro­mot­ers of a com­pany un­der­go­ing CDR has to cough up 2% of the re­struc­tured debt or 25% of lenders’ sac­ri­fice, whichever is higher, as their con­tri­bu­tion. The pro­posed re­struc­tur­ing scheme, ac­cord­ing to an­other banker, calls for re­lax­ation of th­ese two con­di­tions to al­low con­ver­sion of up

to 50% of debt and low­er­ing pro­mot­ers’ con­tri­bu­tion to a lower level (or even do­ing away with it).

PRESENT SCHEMES IN­EF­FEC­TIVE

Many bankers be­lieve that a re­vised and more flex­i­ble CDR scheme could be a more prac­ti­cal ap­proach to­wards re­solv­ing the prob­lem of non-per­form­ing as­sets than other mech­a­nisms like the `Scheme for Sus­tain­able Struc­tur­ing of Stressed As­sets’ and ‘Strate­gic Debt Re­struc­tur­ing’ – com­monly called S4A and SDR – which were in­tro­duced by former RBI gov­er­nor Raghu­ram Ra­jan.

Both schemes, bankers have re­alised over the past one year, have re­stric­tive con­di­tions that turn out to be deal-break­ers.

For in­stance, in S4A, at least 50% of the debt has to be ‘sus­tain­able’ – in other words, which can be ser­viced with the bor­rower’s ex­ist­ing level of EBITA (earn­ings be­fore in­ter­est, tax and amor­ti­sa­tion). Once this con­di­tion is ful­filled then the bal­ance ‘un­sus­tain­able’ debt is con­verted into eq­uity or quasi-eq­uity in­stru­ments. “But, in half the stress as­set cases, EBITA is just not ad­e­quate,” said a dealer of junk loans.

The SDR plan, which en­tails a change of man­age­ment, poses a dif­fer­ent chal­lenge: lenders have to spot a buyer — prefer­ably up­front — and sell the com­pany to the new pro­moter within 18 months. “Bid­ders take ad­van­tage of the sit­u­a­tion, which un­der­stand­ably they would, to de­mand ab­surdly low prices and un­ac­cept­able hair­cuts from banks.. The cred­i­bil­ity of the bid­der, how kosher their money are other fac­tors that slow­down pos­si­ble deals,” said a mer­chant banker.

A re­vised CDR, if ap­proved by the reg­u­la­tor, will have two key dif­fer­ences: first and most im­por­tantly, it has to be­lieve in the ex­ist­ing pro­moter; and sec­ond, debt re­struc­tur­ing would take into ac­count fu­ture earn­ing po­ten­tial (in­stead of the cur­rent EBITA).

In the present mi­lieu where lenders find them­selves un­der the glare of gov­ern­ment’s anti-money laun­der­ing and vig­i­lance agen­cies, RBI may have to soon take a stand on the new debt re­jig scheme.

More so, with a few banks, in­clud­ing SBI, pre­fer­ring to let fu­ture re­struc­tur­ing plans be de­cided in the course of pro­ceed­ings un­der Bank­ruptcy Code.

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