Banks may be allowed to up stake in troubled projects, says Rajan

Banks may be allowed to up stake in troubled projects, says Rajan

As part of productive restructuring of company loans, the RBI has said that banks will be soon allowed to increase their equity holdings in these companies above the current cap of 10 per cent.

 “Keeping in the mind the need for flexibility in financial restructuring while limiting the extent of forbearance, in the next few days, I hope to announce two key relaxations: one is a move towards 5:25 restructuring for existing projects which are standard and also to allow banks to take equity in restructuring to a greater extent than they currently can,” said RBI governor Raghuram Rajan.
Rajan added that RBI is discussing the price at which such conversions can be done with the Securities and Exchange Board of India (Sebi) as of now. He, however, clarified that this move will not mean that banks would take more equity in every situation.

“Indian banks have asked for increased equity as a way of giving them more flexibility in ensuring that the project is put back on track and that the banks get some upside if the project works out and so equity is a form of upside,” Rajan said.“However, that does not mean that banks will take equity in every situation. In some situation the banks may decide not to take equity and retain their debt holdings. We are discussing the contours of the valuation with Sebi,” Rajan added.

Finance Minister Arun Jaitley had in the Budget proposed that he would ease the financing structure for infrastructure projects by introducing the 5/25 rule which allows to let bank to lend money to a developer for up to 25 years.

Bad loans and restructured loans together constitute more than 10.4 per cent of the banking system assets as of the September quarter, with some state-run banks like Central Bank having such dud assets over 20 per cent, while nearly half of them have it between 15 per cent and 19 per cent.

Last fiscal as much as 20 per cent of all infra loans were restructured. As that as of March 2014, infrastructure loans worth around over Rs 57,200 crore were under corporate debt restructuring. He opined that speeding up judicial processes in the country can certainly lead to lower risks for banks.

“In some cases, promoters are deliberately standing in the way of recovery whereas in some cases assets have been taken out of the business, sometimes money has been transferred abroad. There we have to send a strong message that such kind of actions are intolerable in the Indian scenario and you will not get away with us,” Rajan said.

In both the cases, if we can speed up the judicial process especially things like the debt recovery tribunal (DRT) i think it will help and i have argued and will argue again that it will bring down the risk premia that we are subjecting new projects to, Rajan added.

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