Mumbai: Reserve Bank Governor Raghuram Rajan Tuesday said banks may be soon allowed to increase their equity holdings above the current cap of 10 percent in companies undergoing debt restructuring.
The central bank is planning to unveil two measures to enable more productive loan restructuring, he said, adding that it is also mulling extending the 5/25 rule for fresh lending.
This rule enables a bank to extend loans to an infra developer for 25 years with an option to rewrite or reset the terms of the loan or transfer it to another bank or financial institution after five years. It ensures that tenure of the loan matches the life cycle of the underlying asset.
"In the next few days, I hope to announce two key relaxations. One is a move towards 5/25 restructuring for existing projects which are standard and also to allow banks to take equity in restructuring to a greater extent than they currently can," Rajan said, addressing the media after announcing the bi-monthly policy wherein he left all the key policy rates unchanged.
"There is a substantial financial stress in some sectors. We have been taking a holistic view instead of a sector by sector approach keeping in mind the need for a financial restructuring while limiting the extent of forbearance," he said.
Finance Minister Arun Jaitley had in the Budget proposed that he would ease the financing structure for infrastructure projects by introducing the 5/25 rule which allows to let bank to lend money to a developer for up to 25 years.
Bad loans and restructured loans together constitute more than 10.4 percent of the banking system assets as of the September quarter, with some state-run banks like Central Bank having such dud assets over 20 percent, while nearly half of them have it between 15 percent and 19 percent.
Last fiscal as much as 20 percent of all infra loans were restructured. As that as of March 2014, infrastructure loans worth around over Rs 57,200 crore were under corporate debt restructuring.
Rajan explained that as part of a restructuring process, banks' holding in a company had been capped at 10 percent through a notification issued in May 2013.
Meanwhile during the con-call with the analysts, RBI Deputy Governor S S Mundra, said: "In the whole restructuring process, if enterprise is viable and banks are putting a package and if they are taking a higher write-off or haircut in shape of debt, I think there is merit that they can in point of time converted into equity.
"It also has another advantage, that in such cases if there is a turnaround, then the upside is going to promoters alone but when the proportion is high, some of the upside can spillover to the bank."
Rajan said: "As part of the restructuring process, today they can take 10 percent, they will be able to take more...As was the case before I think it was in May 2013. It may revert to an older policy."
He also said that RBI is in discussions with the capital markets regulator Sebi on how to price such transactions so that interests of all stake-holders, including minority share-holders, are protected.
Noting that this is something banks across the world, including in India do, and that banks have been asking some flexibility in ensuring that the project is put back on track, Rajan said: "The key issue is to ensure that transaction is done at the right price, so that banks are not overpaying and the minority shareholders don't get a raw deal. This is what we are discussing with the Sebi now, how to contour such a process."
Stating the proposed measures of increasing the caps are voluntary, Rajan said: "Ultimately, banks will have to take a decision. It does not mean that they will take equity in all situations. There would be situations where they would prefer not to and maintain debt holding. In a sense this is giving more flexibility."
As banks' bad loans have mounted, Rajan has been stressing on the urgency of bringing back stalled projects on productive track, saying the system should help get the invested money back, making productive gains.
Underlining that some bad debts are genuine cases and not because of fraud or bungling by promoters, Rajan said there are a large number of promoters who have taken genuine risks and gotten into trouble because the economy was not so strong, and because the projections were perhaps over optimistic, capital was not structured properly.
"We have to work through such situations. The allocation of losses have to be fair, those who get a lot of upside in good times have to take a lot of the downside as well. That's what we are working on through the CDR Cell and the joint lenders forum," the Governor explained.
He was quick to add that some, however, don't deserve any such considerations, saying that there is a second category of situations where the promoters are deliberately standing in the way of recovery.
"Some promoters are standing in the way, some is fraud where assets have been taken out of the business, sometimes money has been transferred abroad, in such situations we have to send a strong message that you cannot get away with that. We are working with the government and are trying very hard to resolve such issue," Rajan said.
One step to speed up resolutions at the debt recovery tribunal or DRTs. That will help bring down "the risk premium which we are subjecting the new projects to", Rajan said, adding that the government has already talked about expanding the powers of the DRTs and appellate tribunals.
