RBI’s new debt restructuring scheme may not be a game changer

According to analysts and bankers surveyed, India’s Reserve Bank of India’s (RBI) new measure to tackle the pile of mounting bad loans in the banking system was not expected to be a game changer.

New norms pertaining to the Scheme for Sustainable Structuring of Stressed Assets do address some of the issues faced in earlier strategic debt restructuring (SDR) programs, where banks were unable to sell off the assets after taking management control of a company and converting its debt into equity.

The new scheme raised doubts on the practice of banks giving a new loan to repay an old one, also known as evergreening of loans.

According to credit rating agency  ICRA, the move might help the reduce the reported level of gross non-performing loans by 30-100 basis points from the current 7.7% as on 31 March 2016, after a lag of one year (following satisfactory performance of the sustainable debt portion).

The process would commence with loans worth INR 750,000-800,000m ($11 – 12bn) would be taken up for restructuring under the new norms.

The challenge pointed out by bankers is that this scheme is only for projects that are operational. So, several projects in the power and the infrastructure space would not qualify.

Under the new scheme, banks will have to divide the existing debt of a company into ‘sustainable’ (the share which can be serviced by the company even if cash flow remains the same as now) and ‘unsustainable’. An independent oversight agency will ascertain the economic viability of a project and the resolution plan.

The resolution plan needs to ensure that the unsustainable portion of the debt should be converted into equity/redeemable cumulative optionally convertible preference shares. The scheme also limits lenders from granting any fresh moratorium on interest or principal repayment or reduction of interest rate for servicing of the sustainable debt portion.

Analysts believe that this distinction between sustainable and unsustainable debt might also lead to problems and could cause limitations as it depended on the ability of banks to segregate stressed loans and the willingness of banks to absorb haircuts on the unsustainable portion.

Unlike the earlier norms, under new rules, the promoters are allowed to have management control. This, analysts believe, would create a moral hazard as equity writeoff always precedes debt.

However, bankers do expect a smoother resolution with this as compared to the earlier SDR norms. However, its impact will have to be tested over period of time to see how effective this tool had been in tackling bad loans problems being faced by the banking industry.

Source: Business Standard

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RBI Governor Rajan asks banks to refrain from taking majority stake in stressed-debt funds

According to Reserve Bank of India’s Governor Raghuram Rajan, banks should refrain from taking a majority stake in planned stressed-asset funds, and prefers external investors and funds to take up that role.

His words came amid the Indian government’s plans to find ways to lower bank’s distressed debt pile of $120bn, or 11.5% of all loans.

However, bankers have said talks are on for two kinds of stressed-asset funds: one that would buy bad loans from the banks and the other that can invest in companies needing more capital.

Rajan also stressed that pricing would be a key issue for a stressed fund if it wanted to buy bad loans from the banks.

The government, as part of its plan of implementing new bankruptcy laws, is considering setting up an external panel to decide on the quantum of ‘haircuts’ taken on the bad loans, mainly due to disagreements between companies and banks at the time of transacting on such loans.

Source: Reuters

India’s Jaypee Group defaults on debt & interest payments

India-based infrastructure conglomerate Jaypee Group defaulted on its debt and certain other payments, including that on debt, worth INR 44,600m ($661m).

The conglomerate owes INR 29,056m to banks and INR 15,589m in interest payments.

Bank debt, interest payments and other payments owed by Jaypee Group’s subsidiaries is as follows:

  • Jaiprakash Associates owed debt of INR 21,831m, INR 8,374m in interest payments
  • Jaiprakash Power Ventures owed debt of INR 6,884m, INR 1,521m in interest payments
  • Jaypee Cement owed debt of INR 339m of debt, INR 631m in interest payments

Additionally, overdue interest included INR 1,930m on Jaypee Infratech, INR 30m on Jaypee Agra Vikas Ltd, INR 3,086m on Prayagraj Power Generation Ltd, INR 7m on Madhya Pradesh Jaypee Minerals Ltd and INR 6m on Bhilai Jaypee Cement, all of which are Jaypee Group’s subsidiaries.

In order to lower its debt burden, the company divested certain of its cement assets and hydro-power assets to raise c.INR 190,000m ($2.8bn) earlier this year.

Source: Economic Times

Rajya Sabha passes India’s bankruptcy bill

India’s Rajya Sabha (Council of States or Upper House of Parliament) passed a new bankruptcy code on Wednesday.

The insolvency and bankruptcy code, earlier passed by the Lok Sabha, will strengthen lenders to recover outstanding debts by setting a deadline of 180 days for companies to pay or face liquidation.

Currently, over 70,000 liquidation cases are pending in debt recovery tribunals and courts.

Source: Reuters

Stressed asset specialists queue to start an ‘ARC’ in India

Close to 12 companies applied to the RBI for licenses to start an asset reconstruction company in India following the passing of the Bankruptcy Bill (2016) in the Lok Sabha. Applicants ranged from foreign distressed asset specialists to domestic investors with access to considerable funds.

Stressed assets (which include gross bad loans, restructured assets and written-off accounts) for the banking system rose to 14.5%, as of 31 December 2015, compared to 9.8% in March 2012, according to data from RBI.

ARCs play an important role in reconstruction of such stressed assets, RBI said in 2014 when it released a new framework to revitalize the distressed assets.

Applicants who’ve applied include JC Flowers & Co., in partnership with Ambit Holdings Pvt. Ltd., domestic financial services firm IIFL Holdings Ltd. and Sudhir Valia, former CFO of Sun Pharmaceuticals.

Source: DealStreetAsia

India passes Bankruptcy bill

India’s Lok Sabha (House of the people or Lower House) passed the Insolvency and Bankruptcy bill (2016) that would enable faster exits for financially sick companies or help them restructure their businesses. The bill, which was introduced in Parliament in December 2015, will now be put to vote in the Rajya Sabha (Upper House) of the Parliament before becoming a law.

The bill was passed by the government after accepting all the recommendations proposed by the joint committee of Parliament, some of which include:

  • provisions to address cross-border insolvency through bilateral agreements with other countries
  • shorter time frames for each step in the insolvency process right from filing a bankruptcy application to the time available for filing claims and appeals in debt recovery tribunals (DRTs), National Company Law Tribunals (NCLTs) and courts
  • timeline for filing bankruptcy applications would be within three months rather than the earlier time periodse of six months
  • last date for filing of claims is specified at 21 days
  • wages due to workers would receive first priority over secured creditors
  • funds owed to employees from the provident fund, the pension fund and the gratuity fund are refrained from being included in the liquidation estate assets and estate of the bankrupt

The new code covers companies, individuals, limited liability partnerships and partnership firms and replaces existing bankruptcy laws. Under existing laws in India, it takes about 4 years to resolve a bankruptcy (as per Wold Bank’s ease of doing business report), whereas, the new law aims to reduce this time frame to about one year.

Source: Livemint