Money & Banking
Strategic debt restructuring: Banks may face large losses, massive surge in stressed asset of 7 companies
If banks fail to attract buyers for these troubled companies within 18 months, they would face a large Market-To-Market hit on their debt-turned-equity holding, apart from a massive surge in stressed asset formation, says a Religare report 
 
Over the past five months, banks have evoked strategic debt restructuring (SDR) in seven companies carrying total outstanding debt of Rs42,400 crore, says media reports. However, SDR simply kicks the can down the road and without adequate provision, bank may face large mark-to-market (MTM) losses and could witness massive surge in stressed assets, says Religare Capital Markets Ltd, in a research note.
 
As per media reports, banks have so far evoked SDR in seven companies or projects worth around Rs42,400 crore n in the last five months. This includes, Electrosteel Steels with a debt of Rs10,240 crore, Lanco Teesta (Rs2,400 crore), Jyoti Structures (Rs2,360 crore), Monnet Ispat (Rs11,710 crore), Coastal Projects (Rs3,250 crore), Visa Steel (Rs3,090 crore) and IVRCL at Rs9,390 crore.
 
"The biggest drawback of SDR is that banks are not required to carry adequate provisions on their exposure. Thus, should they fail to attract buyers for these troubled companies within the stipulated 18-month period (in itself an uphill task), banks would face a large MTM hit on their debt-turned-equity holding in the ailing company, apart from a massive surge in stressed asset formation as the balance SDR-linked debt slips into non-performing assets (NPAs)," the research note says.
 
 
"We believe this number will only increase as stress on the economy and on cyclical sectors like metals persists. Of the seven, three companies belong to the metal sector and have a total debt of Rs25,000 crore – given headwinds to the sector in the medium term, banks will find it hard to attract buyers. In the event of a significantly discounted buyout, banks will have to take write-offs on their equity/ debt exposures. We expect large write-offs in reviving not only the three metal companies but also the EPC and power companies," Religare said in the report.
 
SDR, restructuring and 5:25 – all these schemes merely push back the problem 
According to the research note, the biggest drawback of the SDR mechanism is that banks do not carry adequate provisions on their exposure. Equity shares are exempt from MTM and the remaining debt will retain its existing asset classification, i.e. standard restructured assets (with 5% provision) in most cases, it says. 
 
In cases where equity conversion takes place at face value, Religare said, the MTM hit will be very high as the underlying value is far lower (30% in the case of Electrosteel Steels where conversion was at Rs10 vs. the market price of Rs3). According to a report from Financial Express, lenders of the loss making, Kolkata-based Electrosteel Steels have decided to convert Rs2,507.57 crore of loans into shares at Rs10 apiece. 
 
"Banks are currently seeing high slippages from assets restructured two-three years ago. The growing SDR and 5:25 restructuring drive could invite a repeat of this situation. In our view, SDR refinancing should be included in stressed asset formation in order to bring in greater transparency on underlying trends in asset quality," the report added.

 

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COMMENTS

Raj K Swamy

2 years ago

Without collusion politician/babus/borrower/middlemen, can these kind of loans been given and then allowed to continue for so long? Unfortunately it is the poor of the country who pay the price of the corruption- the money could otherwise been utilised for their education/healthcare/economic development. And the 24/7 media is fooling the people by crying hoarse about minor-issues such as return of awards etc.

vnrao

2 years ago

MOst of these promotors flybuy night operators without any backgrond encouraged by corrupt congress netas and banks have lent money basing on letter of intent eithout safegaurding these promotors diverted money should be booked

Gupta

2 years ago

It is a laughable claim to say these are standard assets. These are complete write offs in most of the above cases. In most other countries, regulators would take the bank to task for granting such loans and then for not making 100% provision. This is the only area where RBI is lagging way way behind global regulators, though it leads the world in other areas. But this is beyond RBI to fix. If they don't give these ever greening opportunities to banks, almost all PSU banks and many private banks would go bankrupt as their stressed assets are far in excess of their capital. RBI and Rajan are smart enough to understand these problems. But the solution is beyond them. This is result of peak levels of "crony capitalism" practised by UPA. This is far deeper problem than 1997-2002 and will take long time to heal. That is why a non-UPA Govt is required to sustain in power for more than 5 years, despite its other deficiencies. But we will certainly run out of patience and throw them out of power soon and bring back the Gods of corruption to undo all the clean up done in 5 years.

With 22 out of 30 electricity boards in red, reforms an uphill task, says report
Past restructuring packages for SEBs have failed, the 5% average tariff hike in FY15 is modest at best and low agriculture power supply is putting pressure on residential and industrial customers to pick up the revenue slack. An uphill task for SEB reform says Religare, based on a report by PFC 
 
The aggregate losses of state electricity boards (SEBs) remained high in FY2014, the meagre tariff hike in FY2015 has not helped, and even the restructuring packages have failed to yield results. Reforms remain an uphill task and without further clarity on SEB finances, a sector rerating is most unlikely, says Religare Capital Markets Ltd in a research note.
 
Citing a report by Power Finance Corp (PFC) on SEB performance for FY14, Religare says it (the report from PFC) paints a bleak picture, especially for lossmaking states like Tamil Nadu and Rajasthan. Aggregate SEB losses on subsidy-received basis remain worrying at Rs62,460 crore in FY14, down only marginally from Rs70,570 crore in FY13. FY14 cash losses stood at Rs39,150 crore compared with Rs49,560 crore in FY13. 
 
Religare says, SEB finances have long been a contentious issue for the power sector given the political implications arising out of altering power costs for consumers. Past restructuring packages have failed, the 5% average tariff hike in FY15 is modest at best and low agriculture power supply is putting pressure on residential and industrial customers to pick up the revenue slack.
 
Aggregate losses include marginal profits by state generating and transmission companies and trading utilities to the tune of Rs1,610 crore up from Rs1,140 crore a year ago. Distribution companies (discoms) continue to have a revenue gap of Rs0.73 per unit (Rs0.85 per unit in FY13), leading to EBITDA losses of Rs89,930 crore in FY14 from Rs98,120 crore in FY13, Religare says.

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COMMENTS

Mukund Rajamannar

2 years ago

which ones are actually making profit?

Nestle says Maggi on shelves this month, all tests cleared
Nestle India on Wednesday said Maggi noodles has cleared the tests ordered by the Bombay High Court at three accredited laboratories and that the effort will now be on to re-launch the popular snack within this month.
 
"We have received the results from all the three NABL (National Accreditation Board for Testing Calibration Laboratories) mandated by the Bombay High Court to test newly-manufactured Maggi noodles samples," the company said in a regulatory filing with stock exchanges.
 
"All the samples of the Maggi noodles masala have been cleared with lead much below permissible limits," the statement said, adding this has validated their stand, maintained all along, that the noodles were and continue to be safe.
 
"We will make our best effort to commence the sale of Maggi noodles masala within this month, as well as continue engaging with the states where permissions are needed or specific directions may be necessary."
 
The company said Maggi was currently being manufactured at Nanjangud in Karnataka, Moga in Punjab and Bicholim in Goa, and that it was engaging with the state governments of Himachal Pradesh and the Uttarakhand for commencing production at Tahliwal and Pantnagar, respectively.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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COMMENTS

SKRISHNAN

2 years ago

As consumers we have a question to The Food Safety and Standards Authority of India(FSSAI).All of us have read about the raging controversy about Maggi Noodles. How come they are suddenly back on the shelf. Which body in India has cleared it? FSSAI is said to be going in appeal before the S.C.We are not interested in the legal battle. Is Maggi safe or not? -that is the question before the consumer, when it still stands banned in several States.It is high time that FSSAI CAME OUT WITH A CLEAR UNAMBIGUOUS PUBLIC STATEMENT.
SKrishnan, Consumer Online Foundation

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