That banks not only rushed through with the R7,500 crore loan recast of Pipavav Defence but also threw in an additional R4,500 crore is a sign of how desperate they are to keep their books ‘clean’. Pipavav reported an ebidta of less than R800 crore last year and, even at the lower interest rate of 11%, it will need to make more to service even R10,000 crore of its loans. But banks are reluctant to add to their non-performing assets (NPAs) even if the promoters are bringing in a paltry R160 crore as equity. Such a skewed sharing of risks—the promoter barely has any skin in the game—is what makes RBI disallowing forbearance so welcome. Higher provisions—a minimum of 15% compared with 5% now—will make banks think twice before they commit to such large sums.
RBI has surprisingly suggested that banks get more headroom for exposures to a single company though it proposes exposures to groups be cut meaningfully; a discussion paper puts the cap for exposure to a single entity and groups at 25% of Tier-I capital, compared with 15-25% and 40-55% of net-owned funds for groups earlier. Hopefully, sanctions to corporate groups will taper off even before 2019—when the new rules kick in—and banks will also be more cautious in their lending to individual companies than the norms allow. RBI’s intention is clearly to contain systemic risks; hopefully, this will also put an end to the practice of ever-greening loans.
The big learnings banks need to keep in mind when the next round of project financing takes off are that it is important to have both collateral and control. Far too many lenders have ended up with inadequate cover and have been unable to enforce guarantees; some have relied on the valuations of brands to assess the strength of companies, realising only later how unrealistic the estimates were. Without enough of a buffer, collaterals in the form of plant and machinery are virtually worthless given how quickly they lose value once a unit falls into disrepair. Banks must also press for a bigger presence on the boards of companies that they lend to keeping a watchful eye on the operations. In this context, the new rules allowing them to convert their loans into equity at more attractive price than before—though why the shares can’t be bought below par is not clear since it is quite possible the true value of the company is below the face value—can be helpful. Banks need to use this tool wisely, taking care to see they don’t end up with a stake that turns out to have little value; the rules can be an enabler to ensure a smooth transition to a new management. And while the new bankruptcy code will make it easier for lenders to get rid of errant promoters and recover their dues, there cannot be a substitute for good appraisals.