Finding takers

The RBI’s new norms for Strategic Debt Restructuring (SDR), which empower banks to take control of corporate defaulters by converting loans into equity, will arm banks with an additional tool to cope with their problem loans. According to an ICRA estimate, bad loans may rise to ₹4.7 lakh crore, or 5.9 per cent of the aggregate loan books in the current fiscal. But while the new norms may help banks arm-twist recalcitrant borrowers and deter defaulters, it is unlikely to make a big dent in the existing asset quality problem.

For one, the regulator’s move rides on the premise that debt-ridden companies are unable to wriggle out of the debt trap due to managerial inefficiencies or mala fide intent. Yes, a change in management will help in cases where promoters have wilfully diverted funds. But these make up only a portion of the entire bad loan problem. The bulk of bad loans are linked to firms that are stuck with over-capacity and weak demand, and are therefore simply unable to service their debt. Finding buyers for large borrowers in core sectors isn’t going to be easy. The prolonged slowdown in the economy has eroded the market for distressed assets so much that even asset reconstruction companies have found it hard to offload them. Even if they manage to find suitable buyers, banks may have to take large haircuts on such sales, to allow the new promoter make a going concern of it.

Most loans are still over-valued on the bank books. What else explains the increasing slippage of restructured accounts — more than a third — into nonperforming assets in the last couple of years? Banks have already been using the 5/25 rule to restructure many of the infrastructure loans by extending the repayment period up to 25 years. While such debt restructuring will help ease cash flow pressure for infrastructure companies, the regulator has to ensure that such leeway is not misused this time around. Instead of providing a large window for banks to find new promoters, which only increases the moral hazard, the regulator should nudge banks to come clean on their assessment on their existing pile of stressed loans. Banks will have to take the tough decision to write off dud loans, and value assets truly if they want to find ready takers for their businesses. Providing a dispensation that allows banks to absorb such losses in a staggered manner can help them clean up their balance sheet and rid the sector of the debt mess it is in.

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