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RBI norms on corporate loan recast credit positive for banks: Moody's

The new RBI guidelines will allow banks to acquire majority equity stakes in corporates that are unable to honour their debt commitments.

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RBI guidelines on restructuring of corporate loans are credit positive for Indian banks and will benefit lenders, including SBI and IDBI Bank, that have large corporate exposure, Moody's Investors Service said on Monday.

"These new guidelines are credit positive for Indian banks because they have the potential to significantly improve the ability of Indian banks to resolve the troubled corporate loan exposure.

"Although all banks will benefit from these changes, the guidelines will be particularly beneficial for those with large corporate exposure, including State Bank of India (Baa3 positive) and IDBI Bank (Baa3 stable)," the rating agency said in an article titled Moody's Credit Outlook.

Recently, the Reserve Bank (RBI) laid down new guidelines for the restructuring of corporate loans.

"We expect these changes to positively affect banks' corporate loan asset quality. In India, it has proved difficult for an external party to gain control of a company because the existing management has many tools to thwart an external party's efforts. This has been a key impediment in turning around companies in financial stress."

The new RBI guidelines will allow banks to acquire majority equity stakes in corporates that are unable to honour their debt commitments.

And acquiring a majority stake would make it easier for the banks to install new company management.

"These new rules arrive ahead of what we expect will be a significant number of project finance loans, especially in the power sector, coming up for renegotiation this year. These new rules will significantly enhance banks' bargaining power in the resolution of problem loans," Moody's said.

It said the guidelines for the conversion price of debt to equity are also favourable to banks.

"With the danger of getting diluted in unfavourable terms, minority shareholders now have an incentive to pressure the management to fulfill debt servicing obligations," it added. 

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