In a bid to help banks manage bad loans effectively, the Reserve Bank of India (RBI) on Monday relaxed guidelines for lenders restructuring large stressed loans. It has allowed banks to resolve stressed loans by bifurcating the sustainable portion of the debt from the unsustainable part and converting the latter to redeemable cumulative optionally convertible preference shares.
The latest (large debt) restructuring scheme is yet another attempt to provide additional tool to corporate lenders to address the continuing NPA problem.
Reacting to the news, shares of public sector banks gained upto 8.5 per cent on Tuesday. The Nifty PSU Bank index closed 3.16 per cent up at 2557.05.
Emkay Global Financial Services Limited has simplified the scheme and has analysed what it means for the banks and borrowers.
What it means for banks?
– Easing of credit lending conditions, which have become adverse in light of the sustained NPA cycle; Apportionment of stressed loans into sustainable and unsustainable portions would reduce the incremental stress on existing loans
– While banks would have additional tool to mitigate incremental slippage, the credit cost could accelerate as there is a time bound provisioning (4 quarters). Hence, credit costs are likely to remain elevated in FY17 for bank with high large corporate exposures.
– Thus, it would be more meaningful for corporate lenders who have Unimpaired Tier 1 capital (Tier 1 capital less expected Loss given default). Axis bank (11.5 per cent) and ICICI bank (8.8 per cent) in particular; SBI is at 5 per cent.
– Importantly, there are several PSU banks who have negative unimpaired Tier 1 capital (e.g PNB -2.2 per cent, Bank of India -2.7 per cent and Union Bank -0.8 per cent). Such banks will find it difficult to adopt this mechanism.
What it means for borrowers?
– For the corporates who have operating assets and larger portion of sustainable loans, credit conditions can ease, thereby improving their viability
– On the unsustainable portion of the loans, which gets converted into equity, leaves the promoter with little skin in the game as major portion of shareholding will be with the banks; e.g Kingfisher Airlines. The risk is that increased supply of equity shares due to conversion of unsustainable loans, will lead to depression in market price, resulting in immediate mark to market loss for banks. This could be a big deterrent for banks.
– In case where promoter is not changed on conversion of debt to equity, the RBI advises banks to ensure attachment of personal guarantees from the promoters for the sustainable portion of loans. In the event of promoter’s stake getting reduced substantially (due to conversion of unsustainable loans), there will be little incentive for promoter to provide personal guarantee for the sustainable portion of loans.