Defaulters will face the heat if banks have guts to take haircut

Given banks' earnings are already under pressure, the key question is if the banks are willing to take the one time hit

The strategic debt restructuring (SDR) norms, unveiled by the Reserve Bank of India (RBI) on Monday is likely to give a huge boost to beleaguered lenders who are fighting with stressed assets. 

According to the new norms, banks will have the option to acquire 51 per cent stake if a borrowing company defaults even after its debt was restructured. The banking regulator also told the banks to exit the company ‘as soon as possible’.

RBI has mandated that the equity conversion clause needs to be incorporated while the time of restructuring. In order to sell an asset, 75 per cent of the banks in value and 60 per cent by number, should agree on the proposal.

“Take a steel company for example which is in the news recently. The company has a Rs 40,000 crore debt. We have restructured the loan. Now, if the company fails to achieve the financial milestones, we will have the option to sell it,” said a chief executive of a public sector bank.
 

“Global steel majors will all be lined up if banks decide to offer an discount. The banks will take a haircut, for once. But the promoter will come to the street,” he added.

The key question here is if the banks are willing to take the one time hit.

Given banks’ earnings are already under pressure due to rise in bad loans, many banks may not be in a position to do so. Particularly, the bigger banks that have large exposure, could be averse to taking a haircut.

According to a study by rating agency ICRA, banks gross NPAs increased to Rs 3.1 lakh crore as on March 2015 as compared to Rs 2.5 lakh crore in previous year. Some of the sectors that has seen high level of restructuring are infrastructure, EPC and construction, Iron and steel and textiles.

The problem for banks has become more acute because more and more restructured assets are slipping into bad loans. A prime example, of such an issue is Kingfisher Airlines, which defaulted even after debt recast.

According to an ICRA study, 25-30% of slippages in FY15 are from standard restructured advances.

But this does not mean that the takeover provisions can be applied universally, bankers admit.

“We understand that this cannot be applicable to everyone who defaults. But even if we can do it for couple of cases, this will send a strong signal. Such examples will bring more financial discipline among promoters,” said a senior banker.

It is this carrot and stick approach that banks will now follow to address their bad loan menace.