More equity for banks in recast loans

Published: December 3, 2014 4:47 AM

RBI on Tuesday said banks may be able to own a larger stake in companies whose loans were being restructured...

The RBI on Tuesday said banks may be able to own a larger stake in companies whose loans were being restructured; currently they can take a 10% stake. Governor Raghuram Rajan said the idea was to give banks flexibility and help put projects back on track. “The key is to see that banks don’t overpay for the shares and we are in discussions with Sebi to see how that can be achieved,” Rajan said. PK Malhotra, DMD, State Bank of India, told FE the Sebi formula resulted in banks buying equity at a much higher price than the ruling market price. “The idea is a sound one provided the conversion of debt into equity takes place at a reasonable price,” Malhotra said, adding that it would make the project more viable.


Existing infra projects to get 5/25 benefits
The RBI plans to allow banks to use the 5/25 norms for infra loans, now available only to fresh projects, for existing projects. The rule allows banks to refinance a project every five years on new terms without the asset being classified as restructured. The idea is to allow firms to repay loans over a longer period, reducing stress. As such, the repayment tenure should be better aligned with the period when cash flows are generated. Rajan said there was substantial financial stress in some sectors and that the central bank has been taking a holistic view instead of a sector by sector approach keeping in mind the need for a financial restructuring while limiting the extent of forbearance.

In July, the central bank had said in a notification banks could give loans to new infra projects for a 25-year period and refinance them every every five years provided these projects do not become a non-performing asset. These loans would not be classified as a restructured asset — which attracts a higher provisioning — but would be categorised as standard.

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