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To ring-fence risk, Indian banks are increasingly asking promoters of companies with high debt to give personal guarantees on fresh loans or during rescheduling of loans. This is to force promoters to repay loans as corporate guarantees are not enough for recovering from defaulters, say bankers.
A senior executive with State Bank of India said while restructuring loans, additional funding is provided, but a personal guarantee is also asked for as additional security so that promoters stand by commitments. “Personal guarantees are a way of ensuring promoters have skin in the game and implement the turnaround plan and repay loans,” the SBI official said, asking not to be named. The sale of Lanco’s assets and Electrosteel Steels by banks is stuck as bidders refused to give personal guarantees, said a banker close to the development. Promoters of large but highly indebted groups are also being asked to give such guarantees when seeking to reschedule loans. But, the response has been poor with many refusing to do so, leading to a stalemate. Last week, Union Finance Minister Arun Jaitley acknowledged that public sector banks (PSBs) were finding it hard to get buyers for stressed assets.
The move comes after Vijay Mallya, chairman of the UB group, fled to London in March after a default. Banks moved the Supreme Court to recover Rs 9,100 crore from Mallya, who had given a personal guarantee on a loan for the now defunct Kingfisher Airlines. Based on the guarantee, banks are selling personal assets of Mallya to recover their loans, but this will not be enough to cover the entire loan.
Indian banks’ non-performing assets or NPAs (see chart) have been rising in the past few years, and they are forcing promoters to sell assets. For example, banks asked corporate groups like Jaypee group to sell assets to recover loans. Jaypee sold its cement units to Aditya Birla group’s UltraTech for Rs 20,000 crore. Chief executive officers, on the other hand, argue that all the stressed assets are not a result of mismanagement or diversion of funds and, hence, personal guarantees are not required. Many companies, chief executive officers said, fell into bad times because of difficult global conditions, or cancellation of mines and telecom licences by courts.
In their asset quality review, banks have identified around 150 stressed assets and any change in loan structuring now requires a personal guarantee. “Even when a new promoter is coming to a project and the company is part of the corporate debt restructuring programme, banks are asking for personal guarantees,” said a banker.
According to corporate debt restructuring (CDR) cell data, there were 530 cases till March 2015 of banks seeking to restructure debt totalling Rs 4.03 lakh crore without classifying these accounts as NPAs.
The strategic debt restructuring (SDR) scheme launched by the Reserve Bank of India in June 2015 sought to convert a part of bank loans of an ailing company into equity, with the banks owning at least 51 per cent. But, many SDR companies failed to receive a buyer because of these conditions.
