Banking Sector: Positive Developments

Photo: Financial Express

• Banks will soon have the power to convert loans into shares for taking over companies from truant borrowers while promoters who step in to turn around projects will have some breathing space. 
• Lenders will be allowed to hold as much as 30% equity in a company and insert a conversion clause in loan documents — a move that could make it easier for a banking consortium to not only force an existing management to fall in line but also bring about a management change.
• "Sebi and RBI are discussing the details of the conversion price. SEBI of course, is worried about the minority shareholders and RBI is interested in making sure banks do not convert at too high a price," said governor Raghuram Rajan. Asked whether banks can fund the acquisition of companies that are chronic and wilful defaulters, RBI told the media that the regulator is "not against acquisition funding." This is a great step as now management changes can be effected by banks. Recently, you must have seen that in case of Shree Ganesh Jewellery House (I) Ltd (SGJIL), the consortium of banks have decided to withdraw their support for restructuring the credit facilities under the current management. This raises speculation, that in future we might even see a change in management of SGJIL. 
• These measures might encourage promoters with deep pockets to take up projects that are stuck for want of money or clearances. Also, in projects that have been stalled due to "inadequacies of current promoters", a change in ownership and management may be required to revive the project. In this context, the new promoter will be given additional time and banks will refrain from downgrading and reclassifying the loan account. A revolutionary step indeed. 
• I have already said that the Indian Financial Media is giving a wrong explanation of the NPA of the banks. Or in other words, the media channels (especially those ever talkative anchors) and the print media is creating a fear psychosis among the investors regarding increase of the NPAs. Dr.Raghuram Rajan recently said: "I think we should not attribute stigma to an NPA (nonperforming asset). This is a misconception among producers and lenders. Producers think if their account is labelled 'NPA' they are at fault. It only means the account is not paying and there could very legitimate reasons (for that)... it could be because of policy inaction, legal inaction, changes in world prices etc.'' I  had earlier mentioned that with SARFAESI Act (The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) in place most of the NPAs can be required provided the banks took adequate measure while disbursing the loans. 
• Dr.Rajan said banks are even free to lend to accounts that are classified as NPA. While RBI has extended the accounting flexibility it had given banks for sale of NPAs, bankers say stress loan deals are unlikely to take off in a big way if rules for stress asset firms are not relaxed.

Source: Adopted from the Economic Times, February 4, 2015.