Economic malaise in India and corporate debt restructuring

The need of the hour is arriving at just and equitable solutions for the revival of viable borrowers when both the lenders and borrowers share losses in equal measure and not resort to one-upmanship

The present condition of sky-rocketing food prices driven hyperinflation goes way back to 2006 through 2008 following rapid-fire economic cycles of boom, recession and stimulus-driven revival bringing it now to sheer stagflation accentuated by total policy paralysis, utterly bad governance coupled with trust deficit at the national level.To blame the slowdown in the West and coalition compulsions at home is absolutely fallacious and ridiculous. The United Progressive Alliance’s (UPA) flawed policies are the root cause for the current malaise.

 

The so-called heady boom of that period gave a kick-start to the demand for risk equity capital when investment and merchant bankers had field day raising initial public offerings, follow-up on public offers, qualified institutional placements, private equity investments and foreign institutional investors that flooded eastwards from the Western financial markets consequent upon the Western meltdown. Our markets were deluged with funds of all hues and colours, legitimate and illegitimate irrespective of enterprise valuations (EVs) which invariably appeared many a times astronomical!

 

 Following the post-Lehman crisis, beginning 2009 the markets lost their euphoria and sheen. Raising equity at high EVs became difficult and capital-intensive industries in engineering, procurement, reality, infrastructure and power had to go in for large-scale debt-funding via term borrowings from commercial banks and developmental finance institutions, increasingly present NBFCs and also external commercial borrowings.

 

The Reserve Bank of India (RBI), concerned with high inflation resorted to raising the key repo and reverse repo rates a record 13 times since March 2010 only to slow down now! This made debt servicing for the industries more expensive. Suffocated with high interest rates, defaults in interest and installments began to become the order of the day. The heady boom having come to an abrupt end, the focus has now shifted to numbers of bad loans or distressed assets as they are termed in the West.

 

This brought in an era of corporate debt restructuring (CDR), now denoted Greening of loans (!) It seeks to recognize impairment by allowing the reorganization of outstanding debt obligations by bringing about reductions in the burden of the mounting/compounding debts—lessening in the interest rates and rescheduling the installments by extending the term of repayment. This enables increase in the ability of the borrower to meet debt obligations by letting the lender waive in part or forgive or convert a part of debt into equity.

 

To prevent abuse by delinquent borrowers, the RBI-appointed Mahapatra Committee in its fairly comprehensive report, quoting best practices across the globe, has rightly stipulated that the CDR request be approved by at least 75% of total exposure and consent of 60% of the total creditors. As per the recommendations, the promoter-directors are mandatorily required to infuse 15% of their own additional equity upfront to enhance their personal stake in the restructuring exercise. To revive the entities it is absolutely imperative that both the lenders and borrowers sacrifice in equal measure. The promoter-directors cannot be allowed to walk away in gay abandon with the cream of past malpractices when the lenders have to bear the brunt of write-off burden. This avenue has been unfairly exploited by a private airline to get its massive debt converted into equity at inflated valuations by at least half a dozen large commercial banks! So much for implementing and enforcing the rule of the law by the banking and market regulators!

 

According to the CDR Cell, during fiscal 2012 banks have restructured Rs 64,500 crore—an increase of 156% over the previous year— when the banks filed 84 cases.  This makes restructuring the highest since its launch in 2001. It has helped revive the macro-economic conditions for both the banks by promptly recognizing and providing for the impairment of their non-performing assets well in time. The borrowers are also able to reduce their interest and principal debt burdens by providing for sufficient breathing space to genuinely viable units to enable them to bring about a turnaround without having to resort to tedious DRT and court procedures or end in winding up proceedings.

 

The Hindu Business Line in a front page report said: “Wockhardt ready to exit debt recast process”. It reports that the company had first sought the CDR lifeline through ICICI Bank in 2009 when it defaulted on the $110 million FCCB (foreign currency convertible bond) that made worst its outstanding debts of Rs3,400 crore and Rs1,300cr under CDR.  According to chairman Habil Khorakiwala all loans had been restructured and it would settle with the banks that do not want to continue with the CDR process. The company had to close a Rs1,600 crore deal to sell its nutrition business to Danone to repay the debts. It had already exited its non-core businesses as part of regaining financial health.

 

The Apparel Export Promotion Council (AEPC) has sought the finance minister’s help in restructuring loans —out of total outstanding debts of the textile sector of Rs1,55,809 crore, debts of Rs35,000 crore needed restructuring. Its chairman has requested the RBI (Reserve Bank of India) and the Department of Financial Services to give directions for the restructuring move.                        

 

The CDR route for debt mitigation has also been found to be unfairly exploited by Kingfisher, a private airline, by getting a part of its massive debt to banks converted into equity at inflated valuations. So much for implementing and enforcing the rule of the law by the banking and market regulators!

 

The need of the hour is arriving at just and equitable  solutions for the revival of viable borrowers when both the lenders and borrowers share losses in equal measure and not resort to one-upmanship—the borrower enjoying on misused/misapplied bank funds on the one hand and on the other, a vindictive lending bank seeking to squeeze the hapless borrower, more often than not small traders, SMEs, householders, vehicle loan or even a delinquent credit card defaulters who may have valid reasons and only seek additional time and concessions. There is no reason why the concessions are not extended to these small time borrowers where banks resort to extortionist recovery and attachment proceedings while dealing with big ticket chronic delinquent defaulters with kid gloves by bending backwards with concessions.

 

Rightly put by a veteran banker—when a small man owes a few thousands to a bank, he is in deep trouble but when a big tycoon has outstandings running into crores with the bank, it is the bank that faces the music! 

 

(Nagesh Kini is a Mumbai based chartered accountant turned activist.)

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