The Reserve Bank of India on Monday said banks that decide to recast a company's debt under the so-called "strategic debt restructuring" (SDR) scheme must hold 51 percent or more of the equity after the debt-for-share conversion.
Arun Kaul, chairman of UCO Bank, says the intent of the RBI is clear – it is to overhaul the old management and bring in a new one.
It is a good enabler for banks and will deter non-co-operative borrowers going ahead, he says. Further, he sees more companies exiting corporate debt restructuring.
Below is the verbatim transcript of Arun Kaul's interview with Latha Venkatesh and Ekta Batra on CNBC-TV18.
Latha: With these new norms, are you going to see more promoters becoming proactive and being more cooperative for fear that they will lose control? How do you see for example asset sales pick up in the months to come?
A: It is certainly very good enabler for the banks and it would certainly deter the non-cooperative borrowers. It will stop deterrence against them. I am sure borrowers will come around and cooperate with the banks so the distressed assets can be put to the right use.
Latha: You see more companies exit the corporate debt restructuring (CDR) successfully because of the fear of this strategic debt restructuring (SDR)?
A: Yes, it should certainly happen.
Ekta: Could there be apprehension by banks to take over 51 percent of the company on fear that it might be difficult to transfer the equity to a new promoter, hence banks will eventually be lapped with a bad asset?
A: Objective is very clear; objective is to change the management. Objective is not to banks to run the companies. So, banks will be careful because banks can’t run the companies. So, they put the company to stronger hands who can help to turnaround the company.
Ekta: What if you can't find a promoter to take over the 51 percent or how much ever the banks will eventually own?
A: We will have to wait and see how it shapes up.
Latha: On the other hand if there is a serious promoter who despite serious efforts can’t stand by the debt obligation assuming it is a promoter who is doing well, then what would the Joint Lender Forum (JLF) do, what kind of flexibility does it have, can it provide more loans or can it waive the SDR rules?
A: Objective is very clear. Objective is to bring about change of management. If a particular management is not able to perform, look for new management and that is what gives the enabling provisions to the banks – they can do that.
Latha: How easy do you think is the process of conversion of loan to equity?
A: The possibility cannot be ruled down. The Reserve Bank of India (RBI) has very clearly said that all new applications for the loans, banks must ensure the documents itself that the enabling provisioning for this is there. I think all the new agreements, the companies will have to have the shareholders approval for this enabling provision so that later on legal problems could be avoided.
As far as the lenders are concerned, 75 percent lenders agreed to this that in terms of RBI guidelines, 75 percent and USD 60 amount. So, this will be binding on others.
Ekta: Do you think that this tool might have come a little too late and the incremental benefit might not be as much as say one year ago?
A: I would not say it is a bit too late because last year in 2014 guidelines also RBI had indicated something like this that banks can do convert into equity and something like that. Already they had indicated that time. Now with the Sebi clearance and all I think it is a fairly strong deterrent for the willful defaulter and a good enabler in the hands of the bankers.
Ekta: Will this SDR be applicable for 5:25 cases say an account has 5:25 applied to it, can it also have an SDR clause?
A: I think there is nothing that prohibits them. Subject to the guidelines RBI has set, if you comply with that, there is nothing to prohibit that.
Latha: Which sectors are banks likely to apply this debt conversion into equities successfully? Do you see it happening in power or do you see it happening in steel or in roads?
A: It would basically be these sectors only – power, steel and infra only. That is where the major problems are coming up.
Latha: How many accounts or sectors do you have exposure to that might come under SDR? What amount of UCO Bank’s money is involved where you may start imposing these clauses?
A: We will have to work that out. Right now the data is not there with me.
Ekta: Given these new norms do you foresee better year for the gross NPLs in FY16 as oppose to FY15?
A: It should be. So far as UCO Bank is concerned, since we have changed our entire strategy, going forward our NPLs should gradually come down. This will certainly help us to further reduce them.
Ekta: What about Q1 FY16 in specific, will slippages be similar around the Rs 2000 crore that you did in Q3 and Q4?
A: It should be lower than that. It should be much less slippages.
Latha: In Q1 will you see the kind of interest reversals that you saw in the previous quarter? If those interest reversals are less do you think you will get a better net interest income (NII), last quarter it fell by 18 percent?
A: It should happen. As far as UCO Bank is concerned, the small growth, the credit but we don’t see much reversals because there was hardly any restructuring this quarter.
Latha: Overall you closed the year last year with 6.7 percent as gross NPLs, what may be the FY16 number?
A: We do expect NPLs gross and net both to come down.
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