5/25 refinancing scheme making headway, at last

After a lull of nearly 10 months, the 5/25 refinancing scheme seems to be gaining traction even as banks remain cautious on the viability of long-gestation projects.

Bankers fear they will be unable to protect the net present value (NPV) of loans refinanced as the scheme relates to exposure to infrastructure and core sector projects, which have been stressed for a long time.

Introduced in August 2014 and amended in December, the 5/25 scheme makes it easier for companies to repay loans over ₹500 crore since the loan tenures are extended for up to 25 years with fresh refinancing evaluated every five years. However, the interest rate on the loan is typically raised since banks need to preserve the NPV.

Bhushan Steel, for instance, saw the light of the day when it announced that the Joint Lenders’ Forum had approved its plan for a long-term restructuring of the loans. Though the quantum of the refinancing amount hasn’t been disclosed, a consortium of bankers, including State Bank of India, Canara Bank, Bank of India and Punjab National Bank, have a total exposure of about over ₹35,000 crore in the company.

According to reports, bankers have also cleared three other loan refinancing proposals — Jaypee Infratech, Adani Power and Uttam Galva Metallics — worth ₹25,000 crore under the scheme.

However, refinancing works better for borrowers because they do not need to bring in fresh equity as they would need to in corporate debt restructuring. Banks, however, benefit by not having to classify them as non-performing assets (NPAs).

“The 5/25 scheme has seen limited success...The key is that viability needs to be established while refinancing the project. Further, there are no disclosures on the quantum of accounts getting refinanced under the scheme,” said Vibha Batra, Senior VP and Head–Financial Sector Ratings, ICRA.

“One never knows the viability parameters and hence no independent benchmark is available to grade them on the viability. This holds true for all restructured accounts too.

“The kind of slippages we have seen shows that the assumptions on the viability didn’t hold true. It shouldn’t happen that we get similar surprises under this scheme too. So, an independent benchmark could help check on the viability and disclosures.”

In April, referring to the 5/25 scheme, NS Kannan, Executive Director of ICICI Bank, had said at an investor conference call, “I do not think there is anything significant so far being done by the banking system per se under that guideline.

“There would be a number of projects across the system which will qualify for application of the guideline in terms of the sectors and the economic life of the asset, and so on. Banks will look at it on a case-by-case basis as we go along.”