RBI officials will meet senior bankers to juggle their debt plans

A large process to shuffle the debt plans of leading Indian banks is being considered, for which RBI officials are going to hold a meeting with senior bankers of the country.

The new plan is to consider corporate groups, which pass the forensic audit test, produce certificate endorsing the commercial operations date (COD) of projects and have acceptable levels of 'sustainable debt' and some cash flow, for another chance. As of now, the banks are haunted by the ghost of NPAs and bad loans.

The proposal discussed between RBI officials and senior bankers asks the promoters of such companies, receiving lifeline from lenders, to accept dilution of their equity stakes equal to the haircut that banks take on their asset book.

The portion of loan that a borrower is unable to service is called unsustainable debt, and the new proposal asks for its quantum to be converted partly into instruments like cumulative redeemable preference shares. These shares would carry a nominal rate of interest while the balance would be converted into equity. The slice of this debt that changes to pure equity would be in proportion to the haircut that banks take and would also help in bringing down shareholding of promoters and.

This proposal is mainly meant for loans that banks categorise as 'sub-standard' and 'standard'. Talking in detail, a loan is ‘sub-standard’ when the borrower has missed payment of interest of principal once, while it is classified as NPA if the interest or principal is not paid in one quarter, and becomes 'sub-standard' when there is no loan servicing for another quarter.

The banks are then forced to progressively provide extra amount from their earnings in case borrower fails to pay for a longer period, and then categorise these as 'doubtful' or 'loss' assets.

For some time now, the banking regulator and lenders were exploring the idea of forming two funds, one that would infuse equity and the other that would give working capital so that stressed corporate could be revived. However, the finance ministry didn’t like the idea to use National Investment & Infrastructure Fund (NIIF) for these special situation funds. Reportedly, the finance ministry feels like NIIF should specialise in providing growth capital to infrastructure projects, which was the actual purpose behind the formation of the fund.

As of March 2016, gross NPAs of listed companies had touched Rs 5.91lakh crore, with as many as 14 banks suffering huge losses because of it.

Image source