The revival plans of banks to recover their funds stuck with stressed borrowers don’t seem to be working with corporate debt restructuring (CDR) packages of 264 borrowers worth Rs 1,25,093 crore of loans failing and turning into bad assets. Of this as much loans aggregating Rs 42,000 crore of 62 corporates under the CDR mechanism failed during the 12-month period ended December 2016. In all, corporate debt restructuring of Rs 75,000 crore involving 109 borrowal accounts has failed in the last two years, raising the suspicion that these loans were really non-performing assets (NPAs) which were evergreened — or artificially kept out of bad loan books — through CDR packages.
According to the CDR cell of banks, total loans approved for CDR were Rs 4,03,004 crore involving 530 borrowal accounts as on December 31, 2016. Originally, 655 borrowers sought CDR packages, but banks rejected the applications of 125 borrowers involving Rs 70,998 crore. CDR packages worth Rs 14,321 crore failed in the third quarter of 2016-17 and Rs 13,000 crore in the second quarter, that too at a time when banks stopped taking up CDR packages. While there are live CDR cases of 168 borrowers involving Rs 2,07,060 crore, many of them are bound to fail as promoters have either failed to bring in their contributions and personal guarantees or the companies have failed to generate enough earnings to service the debt, said a senior official of a nationalised bank.
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Recast packages of 53 borrowers in the infrastructure and the iron and steel sectors appear to be in trouble. Many failed CDR cases, including Bharti Shipyard (Rs 5,800 crore) and Hotel Leelaventure (Rs 3,000 crore), were later sold to asset reconstruction companies. There are success stories like Haldia Petrochmicals (Rs 4,700 crore) which successfully exited CDR. “We are worried that restructured failure rates might go up. Restructuring was based on some projections that the demand will rise, promoters will bring in equity and assets will be sold. This has not happened. Banks had gone overboard in estimating demand and the promoters’ capability in bringing money. As the rules are stringent we have asked the RBI for some leeway in rules,” said a banking source involved in debt restructuring.
What are the options when a borrower’s CDR package fails to click? The first option is the company could be considered for another package if it is viable. Many banks are now treading cautious in the wake of the arrests of bank officials involved in the Kingfisher wilful default case. According to the Reserve Bank of India (RBI) guidelines, if it is a second restructuring then it becomes an NPA. The second option before the bank is legal action. The bank can file suits and initiate recovery procedures, but it’s a cumbersome process which can last for several years.
As the CDR mechanism is non-statutory in nature, restructuring becomes unenforceable in spite of inter creditor agreement between various lenders. Further, promoters’ equity was financed by borrowed amount that added the burden of debt servicing on banks. Many promoters failed in bringing the required amount or personal guarantee. CDR cell faced problems on account of delay in sale of unproductive assets due to various legalities involved. “NPA is a sickness. If somebody is sick, you must give him the medicine. These are all treatments. First they have to recognise these as NPAs. In our country, all restructurings are to hide NPAs. It should not be classified as NPA… that’s why I’m doing it. What is this 5/25 scheme? These are all hiding. If you hide any sickness, it will become more chronic. Those banks which declared NPAs first, their portfolio is better,” said former RBI Deputy Governor K C Chakrabarty.
The RBI has admitted that since it started the asset quality review of banks in the second half of 2015, possibly up to a sixth of public sector banks’ gross advances are stressed (non-performing, restructured or written-off), and a significant majority of these are in fact NPAs. “For banks in the worst shape, the share of assets under stress has approached or exceeded 20 per cent. This estimate of stressed assets has doubled from 2013 in terms of what had been recognised by banks,” said Viral Acharya in his first public address as the RBI Deputy Governor recently. The RBI and banks know that CDR cases are severely stressed assets. “There have been several hints… in the declining price-to-book ratios of bank equity that many assets “parked” by banks under the corporate debt restructuring cell were severely stressed. These assets were deserving of advance capital provisioning against future recognition as NPAs,” Acharya had said.
Schemes announced by the RBI have remained largely on paper. Under the Strategic Debt Restructuring (SDR) scheme, banks were given an opportunity to convert the loan amount into 51 per cent of equity and were supposed to be sold to the highest bidders, once the firm becomes viable. This measure was unable to help banks resolve their bad loan problem as only two sales have taken place through this measure due to viability issues. In the case of Sustainable Structuring of Stressed Assets (S4A) scheme, banks were unwilling to grant write-downs as there were no incentives to do so and write-downs of large debtors could quickly exhaust banks’ capital cushions. The 5/25 scheme was derailed because the refinancing was done at a higher rate of interest so that banks could preserve the net present value (NPV) of the loan amount. There were few disclosures of the accounts getting refinanced under the scheme. There was a perception this was one of the tools deployed to cover NPAs by banks.
In the asset reconstruction scheme, the major problem with ARCs was that they were finding it difficult to resolve the assets that they had purchased from the banks. Therefore, they wanted to purchase the loans only on low prices. Consequently, banks were reluctant to sell them loans on a large scale.
The RBI discontinued fresh CDR with a provision of five per cent with effect from April 1, 2015. However, from April, banks were told to classify restructured accounts as NPAs and provide at least 15 per cent for fresh recasts. Banks have not added any fresh cases of restructuring since March 2015. On the other hand, banks are taking tough recovery measures against small borrowers. Why are only big loans being restructured under the 5/25 scheme? Why not small-ticket loans? The borrower has no stake here. He has already taken out his own money. It’s only the other people’s money… either the public or banks’ money is involved. Banks are harassing small promoters. In our system, we harass people who are small and underprivileged, and people who are stronger we go and salute them,” Chakrabarty said. The bottom line: If you mask sickness, it is bound to become more chronic.