Strategic debt restructuring (SDR) will not cure all the issues plaguing the banking sector, and instead, will postpone formation of non-performing assets (NPA) worth Rs 1.50 lakh crore to later years, Religare Capital Markets said in a report on Monday.
Calling SDR “a band-aid for a bullet wound”, Religare said that banks are unlikely to fully recover loans by selling assets given the various pitfalls in the SDR mechanism. The brokerage assessed 10 cases in which SDR has been invoked and found that interest accruals and loss funding will raise overall debt by around 70%, from the first recast through corporate debt restructuring (CDR) until the end of SDR.
In fact, if there are no buyers for stressed assets, banks would be compelled to write off anything between 35% and 95% of total interest, including interest on debt and interest on debt converted to equity, in FY17 and FY18. “The haircut in case of a takeover will also be high, resulting in huge provisions for banks even if the SDR is successful,” the brokerage said.
In the case of listed companies, SDR allows banks to convert debt to equity at a price below the current market value.
Banks can now own 51% or more of the equity in the company. In case of unlisted companies, a break-up value should be used which is the book value per share calculated from the company’s balance sheet adjusted for cash flows and financials after the earlier restructuring.
Since its introduction last year, banks have invoked SDR in 15 companies with total outstanding debt at around Rs 81,300 crore. Religare estimates that banks may refinance an additional 15-25 accounts in the next one year, taking the total to around Rs 1.50 lakh crore.
Most of these cases would be loans which failed to turn standard despite being restructured through CDR and are therefore, already stressed. “Lenders will be unable to revive ailing projects merely by deferring or rescheduling debt repayment, if the underlying assets and cash flows are weak,” Religare said.