Banks encouraged to change managements of wilful defaulters; move may also spur M&As
The Reserve Bank of India (RBI) has given regulatory forbearance while lending to large infrastructure projects that get delayed due delays in policy implementation or other external factors.
If the delay is due to management change, then the account will not be considered non-performing asset (NPA) if the date of commencement of commercial operations (DCCO) is delayed or postponed.
This will encourage banks to change management of wilful defaulters as banks can now take up to 30% stake in stressed companies. The move will also help M&As of delayed projects.
To deal with the bad loan problem that is eating up the profits of most banks, RBI and the Securities and Exchange Board of India (Sebi) are also working on a share price formula when banks convert debt into equity. Now, banks are converting it at the six-month average price but often the six-month average is when the share price is battered and banks take a hit from day the debt gets converted by having to mark-to-market. Now the banks may be able to get a better benchmark with Sebi and RBI close to reaching a consensus. While Sebi wants to protect the interest of minority shareholders, RBI wants to protect the interest of the banks which are dealing with customer deposits.
Raghuram Rajan, RBI governor, said in a media concall on Tuesday, "Just because an account becomes an NPA, there should not be a stigma attached to it. If the account has gone bad due to external factors beyond its control, then additional funding to the company will not be considered as an NPA."
Bankers say the regulatory relaxations will help them change managements and manage bad debt related problems better.
Arundhati Bhattacharya, chairman, State Bank of India, said, "The flexibility regarding the DCCO will enthuse companies with strong balance sheets to consider taking over stuck projects."
RBI has allowed flexibility with regard to loans to projects under implementation, where the DCCO along with repayment schedules for such loans are allowed to be shifted the account being considered as a bad loan.
Ashutosh Khajuria, president - treasury and credit, Federal Bank, said, "This will be great boon for banks as lenders will have greater flexibility to revive genuinely distresses accounts. Even in cases were the banks were converting debt into equity the conversion was sometimes were taking place at very low prices resulting banks taking a big hit now both the regulators, Sebi and RBI, are coming to a consensus on a revised formula on the price at which the shares should be acquired."
RBI said in sixth bi-monthly policy on Tuesday, "In the case of projects which have been stalled primarily due to inadequacies of the current promoters/management, a change in ownership and management may be required to revive the project. In this context, the new promoters/developers may require additional time to revive/complete the stalled projects. In order to facilitate change in ownership and revival, it has been decided to provide further flexibility by allowing a further extension of the DCCO of such projects where a change of ownership takes place, without adversely affecting the asset classification of loans to such projects, subject to certain conditions."
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