STRESSED ASSETS SCHEME : A close look at the scheme reveals that this is nothing but skulduggery and playing with jargons to make it look robust.
Even as the Reserve Bank of India (RBI) has become increasingly tough with public sector banks ordering them to clean up their balance sheets by March 2017, it continues to treat the defaulting borrowers (who were responsible for their proliferating non-performing assets in the first place) with kid gloves.
First, it was a scheme nick-named 5/25 introduced in December 2014, under which maturity of loans given to infrastructure companies could be extended up to 25 years. Six months later, this was followed by a scheme for “Strategic Debt Restructuring” (SDR).
Under SDR, banks can convert debt into equity and take control of a company and sell off the assets. They are required to sell within 18 months. If they cannot within this period, full provision has to be made. In about a dozen cases, they could not find a single buyer. This has prompted the apex bank to come up with a “Scheme for Sustainable Structuring of Stressed Assets” (S4A).
The S4A aims to settle large accounts involving borrowings of Rs 500 crore or more. The scheme is targeted primarily at projects in steel, power and infrastructure etc which turned NPAs due to external factors and where no malfeasance is seen. Under this, lenders will first segregate existing debt of a company into “sustainable” (the share which can be serviced with subsisting low cash flow) and “unsustainable” which cannot be serviced.
The unsustainable portion can’t be more than 50% of total debt. It will be converted into equity or redeemable cumulative optionally convertible preference shares. Equity shares thus acquired should be marked to market on a daily, or at least on a weekly basis for listed firms. The bank will need to provide for 20% of total debt or 40% of unsustainable debt whichever is higher.
A close look at the scheme reveals that this is nothing but skulduggery and playing with jargons to make it look robust. A loan is taken for a given project, say setting up of an integrated steel plant. That is a composite entity and cash flow generated from its operation is to be used for amortizing the loan. Either the loan can be serviced (sustainable) or it can’t (unsustainable).
It defies logic to bifurcate it into two parts – a portion that is ‘sustainable’ and the other which is ‘unsustainable!’ Yet, by allowing such bifurcation, RBI is actually asking the bank to literally extinguish 50% of the total debt albeit by proclaiming it as ‘unsustainable’ and converting it into equity. With this, the remaining 50% debt should automatically become sustainable.
The banks will pay a heavy price by having to make a provision of 20% of total debt. Still, they are being goaded to accept on the pretext that this is better than 100% provisioning they will have to make (in over three years) in the absence of S4A. But, 20% hair-cut theory too is imaginary. The actual loss could be much more.
With a major slice of loan converted to equity, the bank will have majority ownership. The extant promoter who is reduced to minority shareholder will have no incentive to turn around the project. The worth of equity held by bank would be reduced to the piece of paper on which it is written. And, there is no guarantee that the other 50% so called sustainable debt could be serviced at all.
Apart from losing the entire debt, there is a further risk of bank having to extend more loans to the promoter (possible de jure once NPA tag goes away, consequent to restructuring under S4A) in the name of turning around the project. Even these fresh loans could be at risk as the latter would be prone to using them for paying off the old ones (so called “ever-greening” of loans).
Restructuring exercise
A stipulation that the restructuring exercise will be coordinated and monitored by an independent agency and would be transparent though good does not inspire confidence. This is because there is hardly any accountability on the promoter. The irony is that in the past, promoters were allowed to go scot free and even now, their wings are not being clipped. Any scheme that does not hold the promoter accountable will not work. So, what is the way out?
The projects for which RBI is contemplating relief are those which suffered due to economic downturn (these are not wilful defaulters). Now that the economy is doing well with growth rate of 7.3% in 2014-15 and 7.6% during 2015-16 and government has already taken steps to de-stress the sectors concerned (steel, power etc), these projects should soon get into a position of generating adequate cash flow. The regulator can wait till then and promoters given moratorium on interest or principal repayment during the interregnum.
Alternatively, banks can take full control of the company in lieu of the debt. Considering that these investments were fundamentally sound but were only victims of down-turn and today their stocks are beaten down, there is no reason why they should fail to get buyers. The experience under SDR is not a good indicator as the allowed time frame of less than one year was too short even as due diligence itself takes several months (perhaps, the RBI was in a hurry to let existing promoters continue with hugely reduced debt!)
Even in an extreme scenario of banks not finding takers, they can run the enterprise with a core group of independent professionals (there is no dearth of persons with experience and expertise available in the respective fields). Once the turnaround happens, at a suitable opportunity, the bank can sell the equity to a potential buyer.
All of this is well within the realm of possibility. However, for it to actually happen, the government and the RBI should shun age-old mindset of being soft towards promoters and become sensitive to protecting resources that belong to the people of India.
(The writer is a New Delhi-based policy analyst)
http://www.deccanherald.com/content/554539/soft-borrowers.html