If at first you don’t succeed, try, try, try and try again. Indian policy makers appear to have adopted the mantra as they mull setting up a state-run fund manager to resolve stressed assets in the banking system after numerous efforts to fix the problem failed. A “Public Sector Asset Rehabilitation Agency” will help deal with the soured-debt problem that is hindering loan growth and an economic revival, advisers to the nation’s finance minister said last month. It’s an old idea being revived now as India’s stressed loans rise to the highest among major economies.
“With more than $180 billion in stressed assets, the government and regulators have to evaluate all avenues including a bad bank to drive better recovery rates,” said Nikhil Shah, managing director at Alvarez and Marsal Inc., a firm that specializes in turnarounds. “The mechanisms offered by the RBI haven’t been successful in resolving bad loans, primarily as the RBI does not regulate promoters and other equity stakeholders and as a result they cannot force resolutions on to them.”
Former Reserve Bank of India governor Raghuram Rajan, who rejected the idea of a so-called bad bank, ensured that the hidden stress on bank balance sheets was bought into the open through an independent audit. He offered avenues including the Sustainable Structuring of Stressed Assets and Strategic Debt Restructuring as ways to rework large impaired loans. None of them, however, have proved helpful. The World Bank estimates that only about 26 cents is recovered on a dollar of defaulted debt in India.
Here’s a look at some of the programs and what’s hindered their success.
Strategic Debt Restructuring
Introduced in June 2015, SDR allows banks to take over a majority stake in stressed companies by converting debt into equity. Banks have to sell the stake within 18 months or start making provisions on these accounts, according to the rules.
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While banks already hold controlling stakes in at least four companies, including Monnet Ispat & Energy Ltd. and IVRCL Ltd., no money has been recovered from these accounts. A wide gap between the valuation expectations of lenders and bidders for the assets are hindering the sale and loan-recovery process.
There has also been a reluctance on the part of officials from state-run lenders to write-off even a part of the debt due to the threat of punishment. Since major write-downs can attract the attention of investigative agencies, lender’s forums are not able to reach decisions on the resolution of stressed assets, advisers to the country’s finance minister said in an Economic Survey presented in parliament last month.
Scheme for Sustainable Structuring of Stressed Assets, or S4A, allows banks to provide borrowers with debt reduction of up to 50 percent. While lenders have invoked the mechanism in at least five large loan accounts, so far, the debt of Hindustan Construction Co. is the only one that’s been successfully rejigged.
Many of the large loan accounts don’t meet the criteria set out by the central bank for implementing the program, while in other cases decisions are delayed as lenders aren’t able to agree among themselves, according to Sandeep Upadhyay, chief executive officer, investment banking, Centrum Infrastructure Advisory Ltd.
As the capital buffer needed to take a deep cut in debt and the size of exposures vary across lenders, it takes time for them to agree on a course of action, said Upadhyay, who is working on the restructuring of several accounts. “In some other large loan exposures to the infrastructure segment, borrowers won’t be able to service even half of the debt with existing earnings — a prerequisite for S4A restructuring.”
The new code aims to slash the time it takes to wind up a company or recover dues from a defaulter. Yet, the framework to implement the law — including information repositories for financial and credit data, the development of a professional resolution industry, and adequate judicial infrastructure — still needs to fall into place.
With loan-recovery cases pending at other agencies in the country, like the Company Law Board, Debt Recovery Tribunal and Board for Industrial and Financial Reconstruction, moving into the new resolution mechanism will be a “challenging task” of dealing with more than 25,000 pending cases apart other corporate cases, estimates by Alvarez & Marsal show.