Raghuram Rajan urges more equity participation by banks in CDR

Published: December 3, 2014 2:08 AM

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

The Reserve Bank of India (RBI) on Tuesday said banks may be allowed own  a larger stake in companies whose loans were being restructured; currently they are allowed to own 10%.

Governor Raghuram Rajan observed on Tuesday that this was a global practice and said the idea was to give banks some flexibility help put the project 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,” the governor said adding that minority shareholders shouldn’t get hurt in the process. Banks have been asking for a higher share of equity so that they enjoy the upside when the company recovers.

However, they want a change in the pricing rule. PK Malhotra, DMD, State Bank of India (SBI), told FE that 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.

The conversion of restructured debt into equity brings in more responsibility on the table for banks, analysts said. Arun Tiwari, chairman and managing director, Union Bank of India told a news channel on Tuesday, “Typically when there is stress, bankers suffer. Now, when there is upside, if I am an equity holder let me have those fruits also.”

The total amount of loans recast in FY14 has been more than R1 lakh crore on the back of R 1.3 lakh crore of referrals. Banking sector non performing assets (NPAs) stood at R2.72 lakh crore in Q2 FY15, up 6.3%, sequentially.

The governor also commented on errant borrowers. “There is a category where promoters are deliberately standing in the way of recovery and some are actually fraud where assets have been taken out of the business and sometimes money has been transferred abroad. There, we have to send a strong message that these kinds of action is intolerable in the Indian scenario, and you will not get away from it”.

By Bhavik Nair & Malyaban Ghosh

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition