Stressed-assets rejig scheme: Banks will find it hard to sell debt

DEFAULT BLUES Conversion of ‘unsustainable’ debt into equity will put question marks on the value of such shares

MUMBAI: The Reserve Bank of India’s (RBI’s) new loan restructuring guidelines aim to help troubled promoters by giving them another chance to turn around faster. But banking experts and consultants feel that lenders will continue to bear a major part of debt, even after restructuring.

The RBI had on Monday announced new rules to lessen the growing bad-loan problem at banks. Experts, however, see in the problem, failure of RBI’s earlier debt restructuring scheme — strategic debt restructuring or SDR mechanism — which attempted to change the promoters of loan-defaulting companies.

According to the RBI’s latest Scheme for Sustainable Structuring of Stressed Assets (S4A), banks can restructure loans for projects greater than `500 crore. The restructure will be done in two parts — sustainable, which includes that part of the loan that companies are able to service, and the unsustainable debt, which is beyond the reach of promoters hit by an adverse economic environment.

The new norms enable banks to convert the unsustainable part of the debt into equity or quasi-equity shares, throwing up the question on the value of such shares and the weak prospect of selling this equity. Since these are bad loans of defaulting companies, the conversion into equity would imply a cosmetic improvement.

“It is a practical thing to write off 20-30% of the debt, which may not get recovered anyway. If it turns around, it will help banks. The challenge in SDR was to replace a new promoter and in India this has not worked so far…Hence this new framework (has been set up by RBI),” said Parthasarthi Mukherjee,MD and CEO of Lakshmi Vilas Bank.

The other grey area of the new scheme is that it could induce banks to ‘fit’ all debt into sustainable to avoid possible haircuts.

“On the unsustainable debt, banks will change role, from lenders to shareholders. Yes, banks may have to write off some part, but if the entities turn that unsustainable portion, banks could get bigger returns. Banks also have the option to sell the equity to offshore funds, asset reconstruction companies, or bring in a new promoter,” said Harshal Kamdar, a partner with PwC India.

According to Nirmal Gangwal, MD, Brescon Corporate Advisers, a key player in restructuring of bad debt: “S4A provides a window of a year for restructuring unsustainable debt. A 20% to 50% haircut could be there, but that debt can be converted into equity.”