With the Reserve Bank of India likely to propose a scheme to allow banks throw a helpline to companies that are on the verge of becoming non-performing assets (NPAs) asking them to consider converting unsustainable debt into equity or preference shares with adequate provisioning but will this really help the banks or be worse for the banks is the big question.
RK Bansal, ED, IDBI Bank does not think it could be worse and does not think it would be a moral hazard for banks. According to him if any company is sitting on a sustainable debt then it should be written off.
According to the proposal the unsustainable loan would be converted into preference shares and equity shares. However, the conversion to equity could mean loss to promoter and conversion to preference shares will entail loss for banks.
Bansal does not think restructuring of standard loans to be negative for banks.
Below is the verbatim transcript of RK Bansal's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: The way the whole thing has been drawn up now, it looks like the banks take a bigger hit and the promoters go scot-free. The extent of equity write-down is less because equity itself is so little, looks like the banks will take the bigger hit. A: We have to see these details but let us say promoter has equity and he takes a haircut on that. Naturally, equity doesn’t have much value at that point of time. So he will finally take a hair cut only if he is equity gets diluted further and some other investors get equity at a price and then his equity gets diluted. Latha: I was trying to do the math which says a company like Monnet Ispat. I don’t want you to take names, I know you have a client confidentiality issue but if their debt is like Rs 12,000 crore and you are going to make Rs 6,000 crore as unsustainable debt. If you take a 40 percent cut then you are losing something like Rs 2,500-3,000 crore whereas Monnet\\'s promoter equity -- I don’t know may be it is like Rs 200-150 crore, if they take a 40 percent cut, it is barely Rs 30-40 crore. Yours is nearly Rs 3,000 crore. There is no comparison in terms of the equity hit and are you serious that you will expect the Monnet shares to one day fetch you back Rs 3,000 crore in the market even five years down the line. This looks very loaded in favour of indebted borrowers. A: Let us look at any case, the point is whatever hit has been taken by banks today, they are sitting on that. So let us accept it, it is there as of now and whatever promoter has invested, if we presume that value has become zero today, so let us start afresh from there. The point is that, promoter -- even if he takes out the promoter and say your equity has become zero, he is going to lose only whatever he has invested in the company. Finally the idea is that if it becomes a good company later, the value should come to the other people more than the promoter. So the question is that if somebody has at Rs 10,000 crore unsustainable debt, it has to be written off. So whether you call it equity or whether you call it anything else that hit has to be taken. Latha: I agree but until now at least Reserve Bank of India (RBI) and new bankers were putting a gun to their head and asking them to find a new promoter. Now that fear will go and other indebted companies who were otherwise paying the debt will also start saying that I cannot pay now, make is unsustainable debt, it is a moral hazard, isn’t it? Where do you stop? Everybody will start demanding this kind of a write-down of debt, won't they? A: I agree. They are not going to take it just like that and it is only a few cases and it could be non-performing assets (NPA) where perhaps we are not able to find new buyers because the debt is too high. Latha: It is even available for NPA guys? A: I don’t know. I have never seen this RBI discussion that you are referring. It should be available for NPA also, why not them. Latha: Then it looks an even bigger moral hazard. Will you all have to take bigger provisioning? Let us discuss profit and loss (P&L), basically will it be bad for banks? A: No, I don’t think so. Let us understand the reality of the situation. If you cannot find a new buyer, if you don’t do restructuring with the existing promoter and if you are categorised as NPA, let us say this will be the sequence which will happen. So, finally once it is categorised as NPA, banks will slowly freeze the working capital then plan will get closed. If plan gets closed, country suffers, everyone suffers and then banks will also be able to cover more than maybe scrap value of some 20-30 percent. Finally, after NPA what? And if you don’t have a buyer today, you will not have buyer later on also so then banks will take much bigger hit. Let us see in any steel company or any company, you may end up taking a hit of 70-80 percent. So whether 70-80 percent is better or whether 20 percent is better today, that is what we have to take a call.
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