Corporate India—especially the chunk comprising over-leveraged companies—is worried about a recent Reserve Bank of India (RBI) circular that says companies with even a day of loan-default can be set on the path of debt resolution and subsequent bankruptcy proceedings.
The circular passed on February 12 abolishes all the earlier debt rejig mechanisms such as corporate debt restructuring, and strategic debt restructuring and puts in place a stringent 180-day timeline post default, at the end of which the company is put under the Insolvency and Bankruptcy Code (IBC) if the debt hasn’t been resolved by then.
Industry captains said the latest guidelines are “rigid and too strict”, especially for the infrastructure sector. Finance chiefs at India’s top infrastructure companies told ET that while this enforces better revenue and cash management, it’s too stringent in an environment wherein debt payment is at times closely linked to payment cycles that aren’t regularised in many sectors, such as power.
“The government and RBI efforts in resolving mounting NPAs have started yielding good results, but rigid and too strict guidelines for initiating default proceedings that will lead to fresh NPAs should be avoided, especially for the infrastructure sector,” said Rashesh Shah, chairman, Edelweiss Group and president of the Federation of Indian Chambers of Commerce and Industry, a lobbying body.
“The economy is showing signs of revival and it is a must to revive sentiments in the banking sector for boosting private investment, which is a necessity for taking growth to 8%+ level,” said Shah.
He said that while the RBI is right in its resolve “to stop abuse of the NPA (non-performing assets) resolution norms and align them with IBC, the circular issued on February 12 by the central bank must be revised taking into account the concerns raised by the banks and corporates that includes the one related to even one day default being subjected to the initiation of resolution process. Flexibility to the banks in handling of the loan accounts to the extent genuine defaults and NPA resolution efforts are not hampered, is the need of the hour.”
Others were harsher in their critique.
“The latest clause is impractical and can’t be implemented unless a host of other, underlying issues are resolved first,” said the finance chief of an Indian conglomerate with interests in energy, highways and airports.
“Take the power sector. There is a three-pronged problem: distributors are strained in terms of payments and themselves ask for higher credit periods; there are a host of regulatory amendments that take years to come into action and lead to arrears; our power plants can work at up to 95% capacity but the supply from Coal India arrests it at 60%. All this has led to payment arrears worth thousands of crores. Unless these issues are resolved, the debt cycle will be a problem and this latest clause will meet the same fate as a CDR or SDR,” he added.
“There are other issues too. The clause says the debt resolution plan has to be a given an RP4 (or investment grade) rating by a credit rating agency. And the company will still be considered an NPA. There is a grave mismatch here. Our suggestion is that the resolution plan should just be vetted by a credit rating agency so as to validate the seriousness of the plan,” he added.
“There is still some ambiguity and confusion in the clause, the clarity to which we expect will emerge in the next few months. Some clarifications have come. For example, if a technical glitch has led to default, or if a company has a proven record of payments, it has 30 days to resolve the problem, failing which the 180 day cycle starts and is counted from the first day of default,” said a top executive at a rival conglomerate with similar interests.
The two conglomerates have a combined gross debt of over Rs 35,000 crore on their books.
“The new notification may result in companies utilising their available funds to meet the stringent repayment norms. They will have to stress out their smaller suppliers by delaying those payments when there is a cash flow crunch,” said Rajesh Shah, managing director at Mukand Steel.
Past track records of companies are important and should be looked at, stressed others.
“If it’s a one-off, there should be a window of opportunity for borrowers to be considered for it if they have otherwise been diligent with their payments,” said the chief financial officer of a of a wire rope and specialty steel company.
Another CFO of a prominent steel company that is currently battling insolvency resolution also had similar views.
“It will give rise to a more conservative approach among corporates and borrowings decrease as a result,” said the CFO adding that the most vulnerable will be the ones coming up with new capacities.
To be sure, the RBI’s new clause comes after all other schemes to address the problem of loan defaults failed, leading to a significant ballooning of bad loans: 10% of total bank loans at last count. The earlier schemes were misused by both borrowers and lenders because it helped hide the true state of stress in the system. Some companies and banks only wanted to avoid NPA classification and not to tackle stress.
Which is why several industry experts have supported the move.
“It’s a step in the right direction. Such stringency will force corporates to act earlier to address the issue which will also lead to a healthier banking system,” said Nikhil Shah, managing director of Alvarez and Marsal , a global professional services firm specializing in restructuring and turnaround cases. It has taken up several insolvency cases in India including that of Essar Steel.
“A company generally has some visibility on its future cash flows. If it sees a deterioration, it should try every step possible—refinancing, restructuring, sale of assets and/or improving operational cash flows to prevent a default.The RBI’s February circular is also a testament that the earlier debt restructuring schemes were largely not working. Whether there is default of dues for 1 or 60 days, the stress has already set in and it is just a matter of time,” he added.