Dirty dozen

Sanjiv Chainani
Mr. Sanjiv Chainani is the Managing Director of Value Line Advisors Pvt Ltd.

Opportunity calling

The Reserve Bank of India has directed banks to initiate insolvency proceedings against all stressed accounts having total outstanding loans of over Rs5,000 crore, with at least 60 per cent classified as NPAs as of 31 March 2016. These accounts qualify for immediate reference under Insolvency and Bankruptcy Code 2016 (IBC). The list includes Bhushan Steel (Rs44,478 crore), Lanco Infra (Rs44,365 crore), Essar Steel (Rs37,284 crore), Bhushan Power (Rs37,248 crore), Alok Industries (Rs22,075 crore), Amtek Auto (Rs14,075 crore), Monnet Ispat (Rs12,115 crore), Electrosteel Steels (Rs10,274 crore), Era Infra (Rs10,065 crore), Jaypee Infratech (Rs9635 crore), ABG Shipyard (Rs6,953 crore), and Jyoti Structures (Rs5,165 crore).

This dirty dozen account for over 25 per cent of the whooping Rs10 lakh crore NPAs in the banking system; and are mainly from the iron and steel, power, and infrastructure sector, with a few from the textile and auto ancillary industry. The RBI has also directed banks to find resolution for another 55 high value stressed accounts within 180 days, failing which it will refer these accounts for resolution under IBC.

Restructuring schemes announced earlier such as CDR, SDR, S4A, etc, have failed to resolve the NPA problem. The crony promoters, many being willful defaulters, have earlier created hassles in the resolution process. Banks too were shying away from taking any decisions as these schemes did not have any legal provisions for stringent actions in case of failure.

The IBC is a step in the right direction as it provides a framework for resolution of the NPAs plaguing Indian banking. It can handle business failures rapidly and swiftly. Entrepreneurs and lenders can move on, instead of being bogged down with decisions taken in the past. It is a systemic reform, taking India from among relatively weak insolvency regimes to becoming one of the world’s best insolvency regimes.

In the event of inability of lenders to find resolution within stipulated time, the IBC provides for proper action including insolvency proceedings against the defaulters. The promoters, who earlier created road blocks, will have to cooperate in resolution mechanism; else they will risk losing control over their companies and their assets.

Lenders have already invoked insolvency in eight out of the 12 cases. For the balance four, lenders are expected to meet shortly and discuss admission to the National Company Law Tribunal (NCLT). It is likely that 8-9 out of these dozen accounts will find buyers.

The RBI has asked banks to set aside 50 per cent provision against the secured portion of these loans and 100 per cent provision against the unsecured part. If the cases are not resolved and these companies end up liquidating, banks will have to make 100 per cent provisioning. In the near term, banks will have to make higher provisions on these stressed accounts in the current fiscal year, taking a hit on their profitability. But a time-bound resolution to these large NPAs will help clean up the banks’ balance sheets – a positive step in the longer run.

As estimated by CRISIL, banks may have to take a huge haircut – up to 60 per cent – on these accounts based on their embedded values. Most of these corporates are quoting at throwaway valuations due to stress on their balance sheets and their inability to service debt and interest; but they have high quality assets. In the event of liquidation, the new buyers of the stressed asset may be granted an extension to pay the loan amount. This could improve liquidity and help revive the NPAs. In the process, the value of the stressed businesses will get unlocked, creating huge value creation for the shareholders.

A similar situation was experienced in 2003, whereby steel companies had undergone the CDR mechanism. Essar Steel, Jindal Vijaynagar Steel and Ispat Industries accounted for almost Rs200 billion out of the total Rs400 billion exposure to the steel sector. The major problem for these companies was that a substantial portion of their debt was contracted at higher interest rates and hence, reduction of the interest rates was a key part of the restructuring – helping them eventually revive and become global giants.

The Indian economy is currently unable to gallop ahead, under the leash of huge NPAs – affecting credit growth. The resolution to will unleash India’s growth momentum. The best times are yet to come for the Indian economy.

This article was originally published in Business India Magazine.
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