Banks as managers

Strategic debt restructuring poses new challenges

The list of companies in which banks have decided to convert their debt into equity under the strategic debt restructuring scheme is getting longer by the day: Visa Steel, Jyoti Structures, IVRCL, Electrosteel Steels, Gammon India and Monnet Ispat & Energy. Under the rules, banks have 18 months to sell the companies they have thus acquired and recover their dues. This scheme was introduced in June by the Reserve Bank of India after the corporate debt restructuring programme didn't make much progress in helping banks bring down their bad assets. Under strategic debt restructuring, the asset classification remains what it was before the debt got converted into equity. This means that banks don't have to make higher provisions against their bad assets for a period of 18 months. This temporary respite perhaps explains why banks have shown such alacrity to convert debt into equity.

While banks look enthusiastic about the new scheme, there are practical problems in its implementation. For instance, many of these companies are in the metals sector, which is going through a severe downturn. China, where supply has leapt ahead of demand, has flooded the world markets with inexpensive steel, aluminium and other metals. This has put a question mark over the viability of local producers. While valuations have plummeted, buyers are cautious because there is no uncertainty when the cycle will turn. Today, there are many more sellers than buyers. The situation is unlikely to improve in a hurry. Thus, it is doubtful if the banks will be able to find buyers within the 18-month window in many cases. And the rapidity with which banks are converting debt into equity could lead to a situation where buyers would be sought for a whole lot of companies. If the 18-month window closes and the banks are unable to find a buyer, they will have to be ready for a re-rating of the asset quality, which could lead to higher provisioning.

Another important question pertains to whether banks that acquire the assets will run the company till they find a buyer. This is not easy to answer. Banks are not in the business of running companies - their job is to lend money. However, control comes with the responsibility to manage the company efficiently. News reports suggest that banks are reluctant to change the management as that would imply taking over the management's liabilities, including legal ones. Many may fear, and justifiably so, that they don't have the bandwidth to manage a stressed company. Meanwhile, some good has come out of the strategic debt restructuring programme: Companies have earnestly started to look at ways to repay debt. Thus, Essar Steel has announced it will sell stakes to strategic investors and the money will be used to pare its debt. Videocon has launched the sale of telecom spectrum in order to pay its creditors. Reliance Communications has decided to sell its telecom tower assets to reduce debt. GMR and GVK too have initiated similar steps. The new scheme has begun making its impact on India Inc, but banks must find a way of ensuring efficient management of stressed companies.