India's floundering bk debt-for-equity deals a warning for China

That followed a collapse of talks with prospective buyer Tata Steel, which had wanted a sharp discount. A new suitor, the Dalmia business family, has shown interest, according to bankers, but there is no offer yet.

In the meantime, the banks have classified Electrosteel's around USD 1.7 billion debt as non-performing, an admission the plan is not working. Both Electrosteel and Tata Steel declined comment.

Chinese lenders are facing rising pressures from slowing economic growth, with non-performing loans reaching a 10-year high of 1.27 trillion yuan (USD 196 billion) at the end of 2015.

"The difficulty faced by Indian banks in finding new owners highlights the challenges that Chinese banks might also face," said Chua Han Teng, Asia analyst at Fitch affiliate BMI Research.

"Chinese banks will likely seek to proceed cautiously with the proposed debt-equity swap plan, and will be extremely selective given that it is not the expertise of banks to manage these highly-indebted companies."

China is studying plans for potential regulations that would allow commercial lenders to swap non-performing loans of companies for stakes in those firms.

The International Monetary Fund said last week that China's massive corporate debt problem could be eased through debt-to-equity conversions only if these apply to viable firms that undergo restructuring.

GOING SLOW

Indian banks are going slow on debt-equity swap deals after a raft of such transactions in the second half of 2015.

While the lack of buyers is discouraging banks, lenders have also been tied up in a separate clean-up exercise ordered by the RBI which wants full loan disclosure by March 2017.

"I don't think (this) is a scheme in its current composition, its current framework, that has enough value for a bank to get into," said Rana Kapoor, CEO at Yes Bank, India's fifth-biggest private sector lender.

RBI Governor Raghuram Rajan has acknowledged that the SDR scheme had yet to be successful.

"We are seeing more buyers come in to the system but a full-fledged operation of (the debt-to-equity swap scheme), I think we are yet to see."

Prospective buyers are discouraged by the prolonged downturn in the steel sector, which has been hit by dumping from China, a senior banker with a state-run Indian lender told Reuters.

Investor interest has also been low in infrastructure, despite a government plan to spend USD 1 trillion to revive the sector, as many large projects that were stalled during a three-year long economic downturn have yet to be revived.

"The slowdown which started in 2012-13 is still continuing even today," said N. Sridhar, director of finance at closely-held Coastal Projects, where creditor banks have taken equity by swapping their debt but have yet to find a new owner.

"Our company is in a niche sector of underground tunnelling...Companies who do not have that kind of experience are looking at us as an add-on to them," Sridhar said.