The RBI has unveiled a new scheme for banks to tackle bad loans of big firms. The Scheme for Sustainable Structuring of Stressed Assets (S4A) will have a sustainable debt part and the remaining part will be converted into equity or redeemable cumulative, optionally convertible preference shares. Speaking to Bloomberg TV India , SBI MDManaging Director Rajnish Kumar urges to be prepared for the worst — writing-off the unsustainable debt.
S4A comes with quite a few riders and calls for a 3 per cent addition to the discount factor, which might be a strain in terms of the aggressive discounting that you may have to take on to your books for those assets. What’s your view on the sustainable portion of the debt component as far as S4A is concerned?
The debt needs to be converted into two portions. One is the sustainable debt, which has been determined on the basis of the free cash flows available. For the unsustainable portion of the debt, there is a choice between converting into equity or a redeemable cumulative, optionally convertible preference shares (RCPS) or optionally convertible debentures (OCDs).
And, we have to do mark-to-market (MTM) valuation. Where MTM is not available, certain evaluation methodology has been given. For non-sustainable debt, in any case provisions are made. We have to determine the fair market value.
And whatever is the shortfall, the provisions have to be enhanced on this unsustainable portion. But the minimum provision requirement in any case is 40 per cent on the unsustainable debt.
Since share prices of debt-laden firms have fallen significantly and cash flows of those companies, including those in the infrastructure sector, are not healthy, will banks be keen on converting the debt into equity and OCD? There is a big strain on the preferred dividend bid because you can’t take that credit if there are arrears. And if there is a discounting of 15 per cent for a year, 25 per cent for two years, how viable is that non-sustainable portion of the debt that is converted into probable equity or OCDs?
The way it has to be viewed is that, once you have determined the sustainable or viable level of debt, be happy with that in the current scenario. And whatever is the unsustainable portion of the debt, make provisions for it.
And if the scenario turns where the cash flows are much better than expected, there is an uptick in the value of the equity, then banks can capture that upside. So, banks have to be prepared for the worst to write-off the unsustainable debt.
But at the same time, depending upon the scenario which unfolds over a period of time, the lender should also be able to take the upside as the promoter will also be able to do. And that is how it has to be viewed. The lender should not be deprived of that upside. So in a sense, it is a much better option than straight away writing off the debt. At least, banks should be able to capture the upside if it happens.
On the point of capturing the upside, which is also limited in some context, you have not considered the revaluation reserves. From that perspective, will the capturing of the upside be really viable?
If the breakup value for the share is, for example, ₹2 per share, banks will today provide ₹8 on that share. Tomorrow, suppose the share price goes up to ₹20 and there are people willing to buy it for ₹20, nobody can stop the lenders to sell off whatever equity portion they hold. Promoters will also have an option to buy that at ₹20.