In this week’s edition of Indianomics, SBI Chairman, Arundhati Bhattacharya tells CNBC-TV18 there are enough private investors willing to pump money into a stressed asset fund.
Speaking to Latha Venkatesh she says the reason for banks proposing to hold majority stake in these funds was that they feel the pain most.
She further said that the banks will be able to put together stressed funds with the help of the National Investment and Infrastructure Fund (NIIF) and the government will invest on stressed funds after investing in infrastructure funds.
Bhattacharya did point out that foreign funds will not invest if their loans are treated below bank loans as they want around 10-12 percent return on their investments in stressed loans.
In the same interview Sanjay Nayar, CEO of KKR India says investors need to be roped in to bail out banks as they need more time to factor in the stressed asset hit.
He also points out at a capital shortage in the system.Below is the transcript of Arundhati Bhattacharya and Sanjay Nayar's interview with CNBC-TV18's Latha Venkatesh. Q: What is your sense after all these meetings of the last two quarters, are you getting a sense that banks and the government have at least got the problem in control and we are on the way to better health? Bhattacharya: I should definitely think so. I think most of us are on the same page in the sense that after having classified so many accounts, it is also important to ensure that the ones amongst these that are already working that they be sustained. India is very resource poor. We cannot afford good units to go down. Not only that, when units go down there are a lot of collateral damage including their own people who are employed there, plus the supply chains and the other dealerships etc that they support. So, it is important for us to ensure many of these units continue to function and function well. Q: Foreign capital has helped or even private equity capital has helped rehabilitate assets in countries like Italy and Greece. Can you give us an idea of how things are worked out in other countries with similar problems? Nayar: I think I can give you a pretty broad view because there are lot of specifics. Broadly in these markets when the government and the banks decided to tackle the problem and invite outside capital, basically there are structures put together which have the banks putting in the assets into a vehicle, the foreign capital putting in money, transformation companies coming in to transform and resolve the assets and there is an element of government collaboration that gives a kind of a equity net to the banks to the extent they take a hit. It is a little different than India but it is a good way to structure a problem and to start resolving and they attracted a lot of capital. I am not sure of the amount but it is couple of billion dollars if not more for each of the countries. Then as you get more comfortable and these are transferring of actual assets from the banks, recognising the hit and moving them into a vehicle. So, they are actual transfers. Of course there is a sharing mechanism of the equity gain that you make and there is obviously a proper waterfall - who gets which part of the debt first. So, it is well thought out and done and that is one way to get started. Then as you get the experience in this then the structures can change, the government can get out of the way, the banks can transfer the assets completely, foreign capital can feel more comfortable coming in independently. So, that is how it is been done at a very broad level. However there are four stakeholders participating in this. Q: Let us take the issue of the hit that banks will have to take, is that the main problem? This meeting ground between the guy who is ready to buy the bad asset and the banks, you can't take a hit beyond a point because of the financials, is that what is stymieing sale of assets? Bhattacharya: No, I don't think so at all. I think you are looking at the whole problem and expecting that the whole thing get resolved in the first instance itself, it never happens like that. We should start with 3 or 4 of the larger ones and then start seeing how it pans out. This USD 2 billion is something that is initially expected, it is not something that is going to be the sum total of all that comes in. So, it is a question of starting off the entire exercise and then proceeding as things happen. Also you need not always put in assets with a 40-50 percent haircut, that again is a generalisation. In these cases there are also good assets where you may not need to take that much of a haircut as well. So, I think it is an imminently doable exercise. What Sanjay Nayar was talking about I think is broadly the way things have happened in other countries and can happen here as well. I think we need to make a beginning instead of trying and imagining that the problem is too large to solve. Nayar: I agree with that. If the attitude is let's give it a try. Start with X number of assets for couple of banks. However I think price discovery is still an issue. I agree you don't have to take a full hit, there has to be meeting ground in the middle and that can be structured very well. The second issue we should not get away from is that are the banks comfortable from the point of view of being investigated later. I think you must address that because a lot of the bankers want to do the deals even if it is in the middle between fair value and marked value but there is hesitation. May be that is the question we should talk about and needs to be addressed. Q: The Finance Minister repeatedly said that he understands that bankers have to strike commercial deals, has that comfort factor come or are some structures needed? Bhattacharya: A few structures are needed and those are getting discussed as well. There has been talk and you all have reported it in the media as well that we are looking at independent committee that may possibly go through the process, not the pricing because that is a commercial decision but the process, to ensure that the process that is taken is fair and transparent. I think that would also give a little bit of comfort to the banks. However this is a way of looking at things that has to be understood by the entire eco-system and obviously commercial decisions have to be respected for what they are. So, yes, there is a lot to be done in that space. There too we are trying and making whatever efforts that are necessary to find and sort of get in place a mechanism that will give the bankers the necessary comfort. Q: What prevents State Bank of India (SBI) from doing it? You are 25-30 percent of the system and a bank whose credibility is beyond doubt. Is it impossible that you appoint your own committee, you can invite a retired judge yourself, you aren’t thinking on those lines? Bhattacharya: You are jumping the gun a little in the sense that we have to get these funds put in place. So, there are a lot of discussions that are going on with various players, both government and private but these things take time. It is not so easy to get it done because even though we may say that the fund structure works very well but the funds themselves have a lot of due diligence that they need to do before they commit the money. Also as you can understand, these would probably be something in the form of a JV structure. So, in that case there are a lot of negotiations that have to be done between partners to ensure that we have in place a working environment or a working understanding so that it doesn't land up in problem in the near future. So, these things take time. As and when those get ready I think the rest of it will also become ready. So, we are working on all of these fronts. I think the amount of effort that we are putting in should have some kind of result within the next 60-90 days. Q: You spoke about the funds, foreign capital is one source of funds. We heard a lot about banks getting together and putting in a fund. The governor said in the press conference after the credit policy that he wouldn’t like such a fund to be majority owned by banks. How do you see this stressed asset fund in India? Bhattacharya: We had suggested something where we thought that we could put in 51 percent and some other player maybe NIIF or some other player could put in 49 percent. The regulator feels that we should not have majority which is perfectly fine with us, we are willing to not be the majority at all. We gave that proposal because we found that nobody else was going to come forth as quickly as we could because we are the real affected parties. So, that was the reason, however I don't think that is going to be a deal breaker. We are perfectly comfortable coming in with much lower amounts and we will see as we go forward how it can be done. Q: In your conversations who else do you think could be interested because when our colleagues spoke to government officials just couple of days back the interest of putting in NIIF money into the stressed assets seem to have receded in government quarters. If government is not going to put any money just for an assumption, will you still be able to get say a few thousand crore from the banks and will you have enough foreign and Indian capital interested in this fund? Bhattacharya: Yes , I think so. I don't think there will be any difficulty. We should be able to do it. As for NIIF I don't think they said that they are not interested because the terms of their reference includes stressed assets. So, the thinking is that they should go first with a fund that looks at greenfield because there is a need today to kick-start the investment cycle and so rightfully I think they were thinking that greenfield should have priority and stressed could come later. So, it is not a question that they don't want to do it, it is just the order in which they would like to do it. Q: How much money do you think can such funds attract both foreign and Indian? Nayar: It is hard to guess that. Q: For starters do you think Rs 10000 crore fund can be put together with banks and privates? Nayar: I think a couple of billion dollars should not be a problem. I agree with Arundhati Bhattacharya if we start small and experiment with various structures. However I want to just come back to the point of having the government funds with banks being as part promoters is one way of doing it which obviously makes it a little conflicted and again you have a issue of not having true price discovery, that is my sense. The other one which I want to float out there is, if we have to go through all of this, what if the RBI could let the banks recognise the hit, I know they already got a stick and carrot approach and they have been quite constructive but what about letting them take the hit upto the fair value and give them another 2-3 years. The real issue is that there is lack of capital. Then you avoid all of this and you go straight to that method, you have true external capital coming in, mark down the fair value, banks get couple of years to write down and then we can talk of structures where the banks can also benefit if there is an equity upside. Q: There are already companies which are viable probably if they are given a lease of life but which have had to be declared NPAs because of the asset quality review (AQR) process that the RBI set in. I would assume that banks would be wary of giving them further working capital and even capex help. How are these companies to be tackled? I understand that there is a talking underway to separate sustainable and unsustainable debt, to convert the unsustainable debt in such a way that both banks and promoters take a hit. What are the ideas that banks and companies can work with? Bhattacharya: I think you have already laid it out as to what we are thinking and what Sanjay Nayar said is a proposal we have already made to the regulator. So, it is not something that the regulators are not aware of. The industry has already made such a proposal to them. The regulators are obviously going to look at it very closely to see how it could be acceptable. They had allowed this when the ARC sales were happening, they had allowed 8 quarters for any hit that was taken in respect of ARC sales to be written down. So, something similar on the same lines could be considered for these as well. The reason why the banks started these discussions and really picked up the pace was because it is important to be able to give working capital to completed units or give the last mile funding. Once you have classified accounts it is very difficult for the banks to get it through their boards, especially the smaller banks find it very difficult. Obviously if you are giving working capital in driblets then it is a much worse thing than not giving it to them at all. So, therefore there has to be a structure outside of the banks that can look at these stressed assets, that can be turned around. One of the things when we are talking about these funds etc, one of the jobs that we believe that these funds could do is actually bring in that amount of money that is required for a working capital or some kind of last mile funding required to do the completion of the project. This could be in the form of equity, it could be in the form of some kind of hybrid instrument or it could be plain debt as well. It could be a priority debt. So, all of these things are there and all of these things are getting considered. Hopefully we will find our way through this. Q: If you could elaborate how can this division be done, can it be done? There is always a fear, that is what I got from bankers yesterday, a fear that promoters will put too much of their debt in the unsustainable bucket because it will be to their advantage. How can this process be made robust? Bhattacharya: I don't think it is up to the promoters to determine what can be done and what cannot be done. These will have to be based on studies and realistic assumptions and the studies would obviously have to be done by experts. When we do anything in our bank, we have a study done by an expert company, thereafter we have a panel of experts who re-vet that thing to see that everything that has been done is in order. So, it will have to go through a process and the process itself could be vetted to understand that it has been taken through the right kind of process. That will determine as to what should be converted into some kind of other instrument and what could be retained as debt. The idea is that whatever is retained as debt should be immediately serviceable. So, I think that itself will give us some pointers but it need not be something that is immediately serviceable today, we can make out very clearly what could be the accretion to the EBITDA as the working capital is given and the capacity utilisation goes up. So, based on that we can work out what is the amount that is serviceable immediately and that amount can be retained as debt.Q: Sanjay your thoughts?Nayar: Let us say that funds do agree to the value at which it is marked, then the second question becomes that all of this gets transferred in the form of debt. So, the whole sizing of the capital structure is the second issue. If all of this becomes as debt then any new money that the funds are putting in for working capital, I agree with Arundhati Bhattacharya that just putting in Rs 10 crore of dribbling working capital doesn't help. However let's say the funds bring in Rs 1000 crore and really fix all the working capital issues and make sure the plants run so that at least we can realise the value, gain the market share, get the EBITDA going, the question then is all this new money that came in, if it is below the debt of the banks and the banks need to be serviced minimum let's say 10 percent on interest then it is like 100:0 debt equity this becomes inferior to that. So, our request really is and we have looked at few deals and it is being approached very constructively, we are saying at least for this new debt, we may not get a supercilious structure, even if we are pari passu then can we at least get serviced? Government rate plus 2-3 percent and that is something like 10-12 percent. If we have to meet in the middle at this marked value of the asset, bring in new capital, I think the equity sharing is pretty easy. We want to control the destiny, the banks don't mind that because we will bring in experts, we will work with the management if necessary and then create equity value which we can then split 50-50. I think this is one way to get started. We are getting to a point where a couple of assets we will all try but I want to assure that if some of these get done I think this can really get going. For those assets which can be resolved, EBITDA can be recovered and they can repay their debt which obviously will get restructured, our debt which is going to be in a way pari passu and hopefully we can create some equity value which we can split 50-50.Q: Funds that both of you are talking about are they near at hand because you can't keep ongoing projects waiting for too long. So, are we really talking about providing working capital only from outside not from the banks themselves because the banks don't want to touch it and these fronts how quickly do you think it can be put together?Bhattacharya: I think patience is the only way we will get there. Let us not become too worried about how things will happen, things will happen.Q: I was just trying to get an idea since Sanjay Nayar was speaking about deals, whether we should expect this kind of activity sometime soon, say within a quarter, should we have some structures in so that some of the debt would be restructured?Bhattacharya: 60-90 days is what we are giving ourselves. Let us hope that we can do it within that period.Q: Will the system also ensure the new restructuring plan that bankers and RBI are talking about to ensure that promoters sell their more robust assets, their probably personal wealth, can it be ensured that they will give personal guarantees so that you get the assurance that they also pay for their miscalculations?Bhattacharya: If you ask about personal guarantees for everything then it is not going to happen. Then the concept of limited liability itself has to be given up. People will not have that risk taking ability that unless there is a problem in the account or unless the promoter wants to keep trying and keep taking risks, unless that happens a personal guarantee for every loan I don't think is really doable nor is it desirable because as I said then very large projects will then not get taken. Who can take a risk of a few thousand crore? There will be nobody who will take those risks.India today needs large projects as well. We need small value SME to pickup as well but we also do need large value projects specially because we are so short of infrastructure. So, I don't think that will happen. However for making errant promoters pay, I think that is happening across the board. I don't see any reason why there should be doubts on that and in any of these if there is a haircut that the banks take, the equity obviously will have to get impacted, there are no two ways about it and I don't think there should be any doubts on this matter. This is something that will be definitely ensured when the banks go in for anything of this nature.Q: Is your sense that growth is picking up at least which will provide business to say steel companies, construction companies? Are you getting a sense that growth will solve part of the problem?Bhattacharya: Though it is still a little patchy but growth is sort of coming back. The reason why bank credit is not reflecting this is because today the commodity prices, the input prices are all pretty low. As a result with the same bank credit you are able to actually achieve better capacity utilisation.Having said that it is also a fact that unless capacity utilisation go above 75-77 percent you will not see new investment coming in. In fact unless it goes to 80 percent, I don't think new investment comes in. So, to that extent I think this time round the growth will precede credit growth. So, it will not be a credit growth led growth. Credit growth will lag growth. Therefore I do believe growth will come back in. The monsoon is a good trigger and if that happens rural demand should also become a little better. Urban demand has been sort of holding its own but obviously it will get reinforced with rural demand. So, we are hoping that growth will come back.Nayar: I fully agree, I think there are definitely signs of growth picking up. I agree that growth will precede credit growth. Retail credit is picking up as well. So, I think consumption and demand is picking up. If you have good rains I think the rural demand should pickup as well. We are clearly seeing signs of volume pickup, not just the price pickup which is great. So, let us keep our fingers crossed but I don't think it is going to be big enough to take care of the NPA problems.Latha Venkatesh: Key Takeaways:1.Banks, government & private equity funds are close to putting together one or maybe two funds to give working capital and last mile funding to unfinished projects of stressed companies.2. Rules are in the making to take out the unsustainable debt of over-priced projects and ensure banks and promoters share the hit.3. Work is underway to constitute a committee comprising some people of high integrity - High Court judges or an ex-CVC official, to vet the process of restructuring debt.4. All these may be in place in a few weeks and the first case of rescuing some of the companies may happen very quickly in 2-3 months.5. Growth and monsoon may bring back some demand and rehabilitate some companies very soon.Latha Venkatesh: Short point, banks and stressed companies are not in the ICU, they are weak but in convalescing stage.
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