Banks will soon get more flexibility to deal with bad loans with a new scheme allowing them to rejig or reformulate their capital structure by converting part of their debt into convertible redeemable preference shares (CRPS).
However, banks will need to make an upfront provision of at least 20 per cent for the entire exposure — although these can be termed as standard assets. The ensuing hit to the net present value (NPV) of the exposure will have to be amortised over four quarters. This is aimed at addressing the challenge of the huge pile of bad loans on the books of banks weighed down by significant amount of debt contracted by many companies with little prospect of recovery in some cases.
An oversight committee, chaired by a high court judge will soon be set up and the rules will be announced by the Reserve Bank of India sometime next week. The committee will only bless the process, the specific decisions on the capital reformulation will be taken by banks. The CRPS can either be converted into equity shares or redeemed.
Although this process is aimed at improving the balance sheets of companies which are currently standard assets on the books of banks, the route can also be used for non-performing assets (NPAs). Banks need to provide at least 15 per cent for NPAs.
The flexibility being given to banks is to help them deal with what are called SMA-1 and SMA-2 accounts. SMA-1 are accounts where repayments are overdue between 30 to 60 days while SMA-2 accounts are those where repayments are overdue between 60 and 90 days. This mechanism is aimed at assisting entities with large debt on their books but inadequate cash flows to service the loans.
While these are standard assets, they could benefit from more equity which would enhance the capital structure. The equity of the promoter will fall but the balance sheet will become stronger. The feeling is that as the economy recovers, the promoter can buy the equity and “earn his way out “.
The aggregate amount of bad loans of Rs 6,24,119 crore at the end of December, 2015, were 9 per cent higher than the Rs 5, 73,381 crore at the end of June, 2015. While Rs 3,06,180 crore worth of loans were classified in the SMA-1 category where repayments are overdue between 30 to 60 days, another Rs 3,17,939 crore was in the SMA-2 category where repayments are overdue between 60 and 90 days.
These Special Mention Accounts follow a fiat from the Reserve Bank of India (RBI) in 2014 asking banks to put in place a mechanism to red-flag troubled loan accounts early in the day so that these could be dealt with speedily. If the loan is not serviced after 90 days it must be classified as NPA.
The central bank had also directed banks to provide credit information regarding their exposures above Rs 5 crore
to the Central Repository of Information on Large Credits (CRILC). As soon as an account is classified under SMA-2, banks have to form a lenders’ committee called Joint Lenders’ Forum (JLF) to evaluate the asset and work towards early resolution of stress in the account.
On a rough reckoning, troubled loans at 27 public sector banks stood at Rs 2.67 lakh crore. While State Bank of India’s (SBI) SMA-2 accounts stood at Rs 60,228 crore, or 5.17% of its total advances, at Punjab National Bank (PNB), this exposure is approximately 6.31% of its total loan book or Rs 24,824 crore. Between them, 21 private sector banks have Rs 49,689 crore of troubled exposure. ICICI Bank tops the list with Rs 10,897 crore worth of SMA-2 loans, followed by Yes Bank with Rs 7,066 crore.
Capital structure rejig
* Banks will soon get more leeway to deal with emerging stress — loans that aren’t non-performing assets (NPAs) yet but could turn toxic at some point
* They will be allowed to rejig capital structures of such firms by converting a portion of the debt into convertible redeemable preference shares