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
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.
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.