Enthused by speedy recovery of loans worth USD 2.5 billion by three lenders including ICICI Bank within days of mega USD 13-billion Essar deal, banks are now looking at resolution of stressed assets totalling Rs 1.25-1.50 lakh crore (nearly USD 20 billion) in coming months.
Having broadly completed the first two stages of ‘recognising’ the stressed assets and of ‘reserving’ or provisioning for such loans in their accounts, the banks are now betting big on ‘resolution’ part of what is being billed by some top bankers as ‘3Rs’ formula to recover their dues.
With the Essar deal coming in as a major catalyst, the banks are prioritising the resolution process by focussing on helping in sale of businesses by corporate borrowers and by converting debt into equity at operating profit-generating companies, according to some top bankers.
Without naming the companies where such deals are in the advanced stages, the bankers said those involved in manufacturing sector stand a good chance of attracting suitors — mostly from abroad and some cash-rich enterprises from within the country with strategic interest in the respective business areas.
Among foreign companies, those from Russia, Canada and Gulf countries are expected to buyout assets in a big way, while a few domestic conglomerates are also looking at strategic buyouts of assets from debt-ridden groups.
As per industry estimates, the banks have classified loans totalling Rs 1.25-1.5 lakh crore as ‘stressed assets’ that can be recovered faster through various ‘resolution’ methods like sale of assets, transfer to ARCs and RBI-provided tools like SDR (Strategic Debt Restructuring) and S4A where debt can be converted into equity while allowing existing promoters to run the businesses where operating profit is being generated.
The ‘resolution’ process has got a major boost after three top lenders — ICICI Bank, Axis Bank and StanChart — got back an estimated USD 2.5 billion last Friday as part of the first payment for their debt exposure to the Ruias-led Essar Group.
The two Indian lenders — which together had an exposure of USD 1.5 billion — will get back nearly half of their money or about USD 770 million in cash, while further USD 750 million of debt will get transferred to Rosneft-led consortium and to Essar’s ports and other businesses, as per the terms agreed upon by them.
Out of the total cash component, nearly USD 350 million was paid in cash to the two Indian banks last Friday, which together with interest payout of about USD 100 million, takes their total collection from Essar to about USD 450 million, banking sources said. ICICI Bank’s share in the total payout is three-fourth, while the remainder is of Axis.
The transferred loans would be backed by sufficient collaterals, while the Indian lenders’ decision to opt for only half cash component showed their confidence in Rosneft’s commitment to the India growth story and in the future prospects of ports and other infrastructure sectors.
This along with a few earlier deals like those involving Jaypee Group and Gammon have given a major boost to the entire resolution process by helping the focus move beyond ‘recognising’ the stressed assets and reserving for them.
“Earlier, it was said that banks are not recognising the bad loans. Then they were asked to make provisions for such assets, but the required focus remained missing from the resolution process even as heroes were made out of recognition and reservation processes,” a top banker said.
“While the first two “Rs” were basically in the regulators and the auditors’ domain, what matters the most is the resolution part as the banks eventually need to get their money back for the overall benefit of the economy and every stakeholder which includes the government (in case of public sector banks), foreign investors, individuals and various fund houses,” he said, while stressing on the need for a change in mindset for a faster and effective resolution mechanism.
“The successes we have had in some recent deals would ensure that the resolution of stressed assets would get the due attention and we may finally have some heroes out of the resolvers,” the banker said, while adding that the banks will need to work with various stakeholders including promoters for this.
Among various resolution buckets available with the banks, ARCs or Asset Reconstruction Companies provide an intermediate avenue as transfer of loans may provide only an accounting cushion, but the entry of some large players including from abroad (Brookfield from Canada being one) in this area can give a major boost.
The second most importation resolution bucket, as per bankers, is going to be sale of assets as there is a good demand for ‘hard assets’ like plants in sectors like cement, steel and power, that have been made unviable in view of adverse commodity cycle and huge debt levels of current promoters.
However, these plants can eventually turnaround with revival in commodity cycle and with the entry of new owners with good cash, who may prefer operating assets as compared to creation of new plants that would require multiple approvals while changed forex market scenario would make investments costlier for setting up new facilities.
However, the problem areas include ‘soft assets’ in areas like construction where no outstanding projects have been created and the new owner might not find something worthwhile on table that itself cannot be created from scratch.
Bankers said that the buyers would ‘cut and slice’ the assets as they might be interested only in areas of their strategic interest, as has been the case in deals involving Jaypee and Essar.