The RBI Shakes the Corporate Tree to Make it Debt Free

Photo: The Economic Times

Mergers and acquisitions are one of the sexiest things in business world, but it has a soft underbelly which is always fraught with risks.

After years of furious expansions including leveraged buyouts of cheap foreign assets, India Inc is now not only slowing down but is also in a debt spiral; displaying leveraged balance sheets which showed a quantum surge in threat - ratio, in their own books and businesses.  

A whole catalogue of reasons played havoc with corporate blueprints: Business and commodity cycle downturn, prolonged up cycle in interest rates, export markets drying up, expansion plans derailed due to environmental and forest clearances, consumption slowdown, judicial activism, witch hunt by the 5Cs — CVC, CAG, CBI, CIC and courts, policy paralysis et al.

Very recently, India Ratings said in a report that almost half of the top 500 corporate borrowers in the country will find it difficult to refinance some of their loans. These borrowers have taken loans amounting to Rs.11.8 lakh crore, of which Rs.5.1 lakh crore is already stressed while another Rs.6.7 lakh crore faces elevated risk of refinancing.

However, Reserve Bank of India recently came out with a proposal (at par with international standards), which gave high flexibility to banks to bail out companies with high debt. The RBI decided to shake the "Debt Tree", to give the ailing companies of India Inc, one more chance to become debt free..

This innovative scheme, for debt-ridden companies, will spell relief in terms of ease of loan repayment period. The scheme will cover operational projects with loans of Rs.500 crore. 

The revised norms are in line with the measures being announced by RBI and the government to reduce the NPA problem. The new guidelines are more beneficial for resolution of those cases where a lot of debt has already been provided for...

Under the scheme, (lending) banks can split the loans of struggling firms into sustainable and unsustainable debt. 

Sustainable debt refers to loans that can be serviced with a firm's existing cash flow. Banks have been given the option of converting the unsustainable debt, which cannot be serviced with cash flow, into equity. 

Apart from most of the PSBs, the biggest gainers will be the companies like Jaiprakash Associates Ltd (Rs.8), Reliance Communications Ltd (Rs.48.50), Vedanta Ltd (Rs.125.50), GMR Infrastructure Ltd (Rs.12.79), Lanco Infratech Ltd (4.87), and so on...

Meanwhile, there were some media reports a couple of months back, that the asset sales along with reorganization efforts have yielded some relief for the Jaypee Group, as the Reserve Bank of India (RBI) has allowed banks with exposure to the (Jaypee) Group to classify the loans as standard assets for the January-March quarter. 

It is pertinent to mention here that both Jaiprakash Associates Ltd and Jaypee Infratech Ltd were set to be classified as non-performing assets (NPAs) during the March quarter, after the RBI’s stringent asset quality review in December. However, the Economic Times, reported that the banking regulator had reduced the burden of provisioning on banks by removing some names from the list of stressed accounts, including Jaiprakash Associates Ltd. “The group has made some additional efforts to ensure that repayment happens as per schedule. This allows us to give them some more time as a standard account,” said a senior official at a public sector bank that has exposure to at least two of the group’s companies.

In March 31, in one of the biggest deals in the domestic cement industry, Jaypee Group announced part sale of its cement business to Kumarmangalam Birla-led Ultratech for Rs.15,900 crore. It is encouraging to note that in FY16, the group managed to pare down debt by a whooping, Rs.25,100 crore. Jaiprakash Associates Ltd sold the Jaypee Group headquarters, commercial space and 250 acres of land in its Noida township project for Rs.2,700 crore to Axis Bank.

Moreover, better-than-expected earnings, strong economic data and lesser obstacles on the global front, will continue to trigger healthy domestic inflows, fueling more retail participation in the coming days with Small-cap and Mid-cap Indices outshining the Sensex/Nifty.

Reserve Bank of India Governor Raghuram Rajan’s remark that, in the land of the blind, the one-eyed man is king, has underlined the reality that the Indian economy is recovering fast, and is robust in the midst of a global downturn.

Bibliography: The Economic Times, Live Mint, The Daily Pioneer and The Hindu Business Line.