New debt resolution guidelines excellent initiative by RBI: IDBI

The new guidelines released by the Reserve Bank yesterday to deal with non-performing assets (NPAs) are an excellent initiative, says BK Batra, Deputy MD of IDBI Bank.In an interview with CNBC-TV18, Batra said the 'Scheme for Sustainable Structuring of Stressed Assets' will balance protecting lender and promoter interest, by making the former feel initial pain of provisioning and the latter of bringing in fresh equity.The new debt recast norms will give some relief to existing promoters [as compared to the SDR scheme in which banks could overthrow company managements at will], he said.Below is the verbatim transcript of BK Batra’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: Looks like you guys will have to be providing the munificence and therefore upfront actually you will have higher provisioning. Probably some relief later but initially more pain for you?A: You are right but let me say that the guidelines are an excellent initiative by Reserve Bank of India (RBI) towards resolution of stress assets. Particularly large assets where this has been an issue, that a small or a significant portion of the outstanding debt may need to be in some way taken care of either through conversion into instruments or gradual write-down.I agree that lenders will have to bear the pain of initially provisioning and I wish that that could have been pegged a little lower than where it has been currently -- that is 40 percent of part B instrument and 20 percent of overall debt. However, even if it is so, I think it is really a very good step forward for banks, for promoters and also for those who would be interested in buying into such debt or may be taking over the management of such companies as promoters through investment of fresh equity funds.Sonia: Can you give us a sense of how much provisioning could go up for banks like yours in the very near-term as some of this debt starts getting written off?A: Very difficult to make an estimate of that at this point in time. There will be several accounts, but it depends which account we want to take through this route and then what is the eventual resolution, what percentage of the debt becomes Part B debt and therefore, what exactly would be he provisioning. So, this will unfold as we estimate the number of accounts qualifying for this kind of resolution and everybody getting together to move forward in this.Latha: There are a lot of this very high provisioning requirement, the fact that 75 percent of the lenders have to say yes and of course, this oversight committee is also there. So, there are a enough roadblocks to ensure that there is no collusion in these cases. But, we have made a list of companies where the interest coverage ratio is not even 1. The earnings before interest and taxes (EBIT) does not even cover the payment of interest. How many such cases do you think will get done? 20 percent?A: I think so. I think the number would be more than 20 percent and one can then make a guess of what all it will involve. I would like to mention that what you mentioned as roadblocks are not roadblocks, they are really good safeguards which have been put in to ensure that the exercise is balanced. It is seen that lenders’ interest is duly taken care of. Lenders themselves will also have to use this mechanism judiciously because this involves large upfront provisioning and since there will be oversight, since there is a mandatory-ness reiterated by RBI in this that 50 percent of the lenders agree by number and 75 percent by value, everyone will have to agree to it. I hope that is ensured in some way. I would say that this is something which should be used well by all concerned for resolution. I am particularly heartened by the fact that this will generate good interest in outside parties.Latha: That is what I was wondering why do you say that, you mean before you give this munificence to the promoters you will arm twist them into saying that you will sell out a bit?A: No, in fact this dispensation has come, as a relief to existing promoters also. What is permitted is even with existing promoter’s this kind of resolution can be worked out. So one will see where there is need to bring in outside promoters or not bring in outside promoters and carry on with the existing ones. Why I say that outside interest would be there is because a provision for gradual write down and somewhat stiff provisioning upfront which is what I an outside investor would look for. There should be a sustainable level of debt to be serviced. If the debt amount is high then he is deterred from come in. If it is manageable then he would be encouraged to come in. You see what is mentioned is that this sustainable debt will be test of sustainability. It will be tested on the basis of current cash flows. For a moment I thought it is really constraining for us because you see what happens in stressed assets initially the cash flows are low, capacity utilisations are low and then they get built up over time. I wish a little more time could have been given; RBI has permitted a six months prospective period of six months to count cash flows. However, may be they are wanting to avoid any speculative projections, any excessively optimistic projections and wanting to peg them to the currently level of earnings. Whatever currently levels of earnings can support only that would be the sustainable debt and that to serviceable within the currently applicable repayment schedule. So, they are not wanting any change in current repayment schedules. They are not wanting us to make any optimistic projections, they are wanting us to test what debt can be serviced based on current cash flows within existing repayment schedules and convert the rest into Part b instruments. So, it is a really tight and good way forward. Some tweaking may be required but that is something I think we will be workout as we move forward with the mechanism.