PROMOTERS GETA SETTLEMENT PUSH

PROMOTERS GETA SETTLEMENT PUSH

New rule may add to provisioning burden but aid in loan recovery

Promoters of any large account in which the banking sector had an exposure of Rs 20 billion and above were in for trouble if they did not settle their dues soon, said experts. The impact on banks in terms of bad debt numbers and provisioning will remain elevated. estructuring, should be put through a resolution plan if the accounts were in default.

If an account is in default with one bank, other lenders in the consortium will have to try and make the account good. Otherwise, the account could be classified as a stressed asset later, experts said, requiring high provisioning. But more clarification on this would be required, they said.

Bankers said considering most accounts under restructuring have defaulted in the past, the new framework would force these accounts to the resolution path. However, the loans would have to re-rated again.

This could be bad for the promoters because of two reasons. One, if the account is in default, a resolution plan will have to be implemented within 180 days from March 1. If no resolution is found, the account has to be referred to the insolvency court. Second, even if one bank in the consortium objects to the resolution, the account will be subject to insolvency proceedings directly.

In an insolvency proceeding, a promoter cannot bid unless he has cleared his bad debt. This is akin to losing control of the firm.“There is a lot of incentive for banks and promote rs to find are solution before the matter moves to the I BC ,” said Ashish Chhawchharia, partner, restructuring services, Grant Thornton. “If it goes to court, there is no certainty if the promoters will remain in the company, and the hair cut banks will have to take ,” he added.

This will improve recovery by banks, but lenders may have to grapple with rising provisions in the short term. Experts, however, argued that banks had already made provisions for stressed assests.The rules also tighten the screws on some private banks that had delayed the resolution process, bankers said.

Some of these lenders have also raised objections to resolution plans from the joint lenders’ forum, to avoid classifying an account as a nonperforming asset (NPA). Banks had allegedly used the earlier framework extensively to hide their bad debts, instead of opting for resolution. Former RBI governor Raghuram Rajan had termed this asa“per verse incentive ”.

For example, such an account can get at least 18 months if rejigged under strategic debt restructuring (SDR). “A lot of the processes were not functioning well because lenders would either not come for meetings, or those attending the meetings did not have the authority to take decisions,” said Aashit Shah, partner and chair of financial services at corporate law firm J Sagar Associates. “Some lenders would sign up for the restructuring arrangement, some would not. This resulted in a lot of uncertainty,” he added.

New Plan will delay recovery syas india inc

RBI had said companies will get six months from March 1 to get their house in order or go for bankruptcy

Corporate leaders on Tuesday said the Reserve Bank of India’s (RBI’s) move to bar all corporate debt-recast programmes and send them to the National Company Law Tribunal (NCLT) after a six-month window is “disruptive” and will impede industrial revival.

“The RBI should first tell us how many of their previous plans, such as S4A, CDR, 5:25 schemes, etc, have worked? If these schemes were a failure, then the RBI should first acknowledge it. Now, what is the guarantee this scheme will help banks or corporate entities?” said a chief executive of a large infrastructure firm, asking not to be named.

“This move is disruptive and will certainly bring down credit growth of banks to the corporate sector, as no company will start a new project,” he added. Late on Monday evening, the RBI scrapped all existing norms and said companies will get six months from March 1 to get their house in order or go for bankruptcy.

“If a scheme is not agreed upon and implemented already, then SDR (strategic debt restructuring) will no longer continue, as all schemes will be dismantled with immediate effect by the RBI,” said a corporate lawyer. This is likely to impact the debt-recast plans of infrastructure, power, telecom, and road companies, he added.

This comes at a time when industrial production moderated to 7.1 per cent on a year-on-year basis in December last year, despite a favourable base effect. The moderation was due to lower growth in manufacturing, infrastructure, and consumer goods. The chairman of a large company said the RBI move would make sure that stalled projects in the power and infrastructure sectors would remain stalled.

He added that the central bank should have taken into account external reasons that led to a company becoming a non-performing asset. Many telecom companies turned defaulters after the Supreme Court cancelled licences granted by the government in 2012.

Similarly, many power companies failed to take off as coal mine allotments were cancelled. “The RBI is slowly shutting off the tap for corporate India. The government has to decide whether it wants investments or not,” he said. Forty companies have already been sent to the NCLT.

The Business Standard, New Delhi, 14th February 2018