Mumbai: A group of 22 banks is close to recasting Rs.10,000 crore of loans advanced to ABG Shipyard Ltd,
offering India’s largest private shipbuilder a breather under the
corporate debt restructuring (CDR) process for bailing out financially
troubled borrowers.
If a deal is reached with ABG Shipyard, it will be the second
biggest loan recast in recent times by Indian banks, next only to the Rs.13,500 crore debt reorganization done for engineering and construction company Gammon India Ltd in July.
ABG Shipyard’s CDR proposal has received the consent of
major banks in the lenders’ consortium, but is yet to be finalized by
the CDR Cell, one of the three entities in the CDR system (the others
being the CDR Standing Forum and the CDR Empowered Group) because a few
creditors are yet to approve the plan, said two bankers directly
involved in the development. Both declined to be named on the grounds
that the issue is a sensitive one.
Bankers will meet next week to discuss the proposal. They first met in mid-November to discuss the loan recast.
“The recast should go through as major lenders have agreed to it,” said one of the bankers cited above.
A senior executive at ABG, who spoke on condition of anonymity, confirmed that the restructuring exercise is on course.
ABG Shipyard fell into trouble after a slump in freight rates and decline in global trade hurt demand for new vessels.
Indian shipbuilders have not received new orders for bulk ships since 2007.
Many other Indian companies are also struggling to repay
loans in the face of slower economic growth, which fell to a decade’s
low of 5% in the year ended March, high borrowing costs, and delays in
securing mandatory project approvals that hurt their cash flows.
In a separate deal, banks have approved a Rs.4,000 crore recast for Hyderabad-based infrastructure company Soma Enterprise Ltd.
“ABG
has a genuine case for recast as the economic slowdown has hit the
company. Also, its competitors abroad have a clear advantage in terms of
better technology,” said the second banker. “But we do expect the
cyclical factors to play (out) and the firm to recover once the economy
begins to pick up.”
Under CDR, banks typically offer a payment holiday to a
financially stressed company, stretch the period in which the loan has
to be repaid, cut the cost of borrowing and sometimes even take a
‘haircut’ by reducing the amount of debt the borrower has to pay back.
A CDR is approved if at least 75% of the creditors by value of the loan and 60% by number back the proposal.
According to officials at the CDR Cell, restructuring cases worth Rs.22,000 crore were referred to the CDR Forum in October but that number dropped to two cases involving loans worth Rs.1,000 crore in November.
Cases referred in October included a Rs.2,500 crore recast for Gujarat NRE Coke Ltd, and a Rs.5,000 crore loan restructuring for Era Infra Engineering Ltd, besides the ABG Shipyard proposal.
“The decline in number of cases in November cannot be
termed as (a) recovery as till November, there was a rush of companies
approaching banks. It is too early to say the bad phase is over,” said
the first banker.
Indian banks added another Rs.22,000
crore of loans to the restructured loan pile in the three months ended
30 September, a majority of them in the iron and steel, infrastructure,
textile and power sectors. This included a Rs.3,000 crore recast for pipe maker PSL Ltd and a Rs.4,000 crore recast for Bombay Rayon Fashions Ltd.
In the June quarter, about Rs.20,000 crore of loans were recast under CDR. Another Rs.15,000 crore of loans were recast in the March quarter
Besides CDR, banks also restructure loans on a bilateral
basis with the borrower. Although an aggregate figure for bilateral loan
recasts is not available, bankers say such restructuring may nearly
equal the CDR figure.
Infrastructure firms have been particularly badly hit by project delays. Close to 215 infrastructure projects worth around Rs.7 trillion have been held up, according to an April estimate by the finance ministry.
In recent months, the government has initiated steps to clear up the policy logjam.
“We should be close to the peak of restructuring cases,” said Hatim Broachwala,
an analyst at Karvy Stock Broking Ltd. “There is an expectation of
revival in the economy and this should translate into better
performance.”
Banks recently decided to tighten their norms for loan
recasts, alarmed at the prospect of such loans turning bad. About 25-30%
of restructured loans are likely to turn bad in the absence of a strong
economic recovery, analysts say. Banks need to set aside money as
provisions against restructured advances. If a loan turns bad, the
provisions rise further.
Gross non-performing assets of 40 listed banks grew 36.95% from Rs.1.67 trillion to Rs.2.29 trillion in the September quarter from a year-ago.
In May, the Reserve Bank of India (RBI) tightened the
rules for loan recasts to prevent misuse of the facility by companies.
The central bank said promoters had to provide a personal guarantee in
all cases of restructuring and that a corporate guarantee could not be
accepted as a substitute for a personal guarantee.
Promoters also had to bring in a minimum of 20% of the
loan amount that a bank would forego in such a recast, or 2% of the
total restructured debt, whichever is higher, RBI said
.
According to the guidelines, for restructured loans on
their books in May, banks needed to increase provisions to 3.5% of
restructured loan value with effect from 31 March 2014 and 4.25% with
effect from 31 March 2015. One year after that, effective 31 March 2016,
all provisions on restructured loans would increase to 5%. For loans
restructured after 1 June, the provision was increased to 5% of the loan
amount
.
P.R. Sanjai contributed to this story.
MUNTAZIR ALAM
PGDM 1ST SEM
IIMT COLLEGE OF MANAGEMENT
GREATER NOIDA
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