Only a dozen large companies are benefiting from the overhaul of bank loans, the most stressed companies are not eligible
Bombay: The highly publicized single debt overhaul program announced by the Reserve Bank of India last year has not elicited much reaction, with just a dozen companies with debt over Rs 1,500 crore opting for a loan restructuring by commercial banks.
According to bankers, the total corporate sector debt restructuring will be around Rs 2 lakh crore to Rs 3 lakh crore. The regime was applicable until December 31, 2020.
Shapoorji Pallonji Group and Kishore Biyani’s Future Group are among the companies that have received bank approval for the overhaul.
Bankers said that apart from these two groups, some of the thermal power plants have also sought to restructure their debt. “These thermal power plants have cash flow problems because there is a late payment of dcoms [power distribution companies]“Said the managing director of a commercial bank.
However, the central bank expects bad loans to increase, as strict standards for recasting loans have made most of the large borrowers ineligible for the program.
The Shapoorji and Future cases
While the banks have agreed to restructure Future Group loans, the company may not need the waiver if its deal with Reliance Industries goes through. Reliance Industries has offered to acquire the retail, wholesale, logistics and warehousing business of Future Group for Rs 24,713 crore.
“For the Future Group, restructuring is Plan B, in case the Reliance deal does not materialize for some reason. If the deal happens, no restructuring is required, ”said the bank manager quoted above.
“Likewise, the Shapoorji group is also sitting on a lot of money, but there is the Tata problem. Whether these two accounts really need a debt overhaul or not, we’ll find out in the next 2-3 months, ”the executive added.
Shapoorji Pallonji, who has a debt of Rs 10,900 crore, decided to restructure the loan after Tata Sons asked the Supreme Court to block the group’s plan to pledge part of its 18.37% stake in Tata Sons , valued at over Rs 1.78 lakh crore, to increase Rs 11,000 crore.
“We are not seeing any major damage from the corporate sector. There are very few instances where there is a real problem. So overall there are only 10 to 12 big accounts, ”the banker said.
“Most banks have indicated that their restructuring portfolio will be 2-3%, which equates to around Rs 2 lakh crore to Rs 3 lakh crore for the banking system,” added the banker.
Why the regime saw a lackluster response
Bankers said some of the companies in industries – like the hospitality industry – which are hit hard due to Covid-19 have asked for a debt overhaul, but loans from these companies are mostly below Rs 500 crore. .
According to the RBI’s one-time debt overhaul standards announced in September 2020, banks must seek approval from a committee headed by senior banker KV Kamath to restructure loans over Rs 1,500 crore.
Bankers said the strict standards set by the Kamath panel are also behind the lackluster system-wide response to the program.
One of the parameters recommended by the panel for a company to be eligible for the overhaul was a Debt Service Coverage Ratio (DSCR) of 1.0 and above. DSCR indicates the debt service capacity of the borrower. It is defined as the sum of the net cash provisions for the year concerned, plus interest and finance charges, divided by the addition of the current portion of long-term debt with interest and finance charges.
This means that the borrowers’ cash flow must be greater than what is needed to service the debt.
“If the cash flow is positive, why would a company resort to a debt overhaul,” said another general manager of a commercial bank. Due to these standards, many companies were not eligible for loan restructuring.
Bad debts will increase
Since companies that have been financially affected by the pandemic have not been able to restructure their debt, non-performing assets (NPAs) in the banking system are expected to increase.
In its financial stability report released on Monday, the RBI predicted that banks’ gross NPA (GNPA) would rise from 7.5% in September 2020 to 13.5% in September 2021 in the base scenario and to 14.8 % in a severe stress scenario.
The central bank observed that the numbers could change depending on how the one-stop-shop for restructuring was used by banks.
“These GNPA projections are indicative of a possible latent economic depreciation in banks’ portfolios, with implications for capital planning. One caveat, however, is that given the uncertainty over the current economic outlook and the extent to which regulatory waivers in restructuring are used, the projected ratios are likely to change in a non-linear fashion. The RBI said.
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