RBI gives new powers to Banks for debt recast

Discussion in 'Economy & Infrastructure' started by Simple_Guy, Jun 10, 2015.

  1. Simple_Guy

    Simple_Guy Regular Member

    Jun 2, 2013
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    While RBI has given more teeth to banks to nail wilful defaulters, not many are convinced that taking over a company is a bank's core competence

    In order to tackle the NPAs, RBI has provided a mechanism to lenders to recover bad loans. The RBI has allowed banks to acquire 51 per cent or more stake in companies defaulting after restructuring their loans. The keyword here is restructured assets.

    Following are five pros and cons of this latest RBI move, as seen by both sides of the divide in the banking industry.


    1) The initiative will strike a fear in the hearts of promoters from defaulting as they might end up losing their companies. Such promoters might start bringing in funds from their other ventures to keep this company from slipping away.

    2) Banks will be able to clean up their books rapidly and still hold on to the asset. Banks will move the company from their lending books as loans get converted to equity. Such a conversion has also been exempted from calculation of capital market exposure and will not attract mark-to-market provisioning.

    3) Change in ownership will help banks recover their money fast if the change in management brings in the desired results.

    4) Since most of these companies are sick and do not have any net worth; valuation was a tricky issue. RBI said that the conversion of debt to equity will be at a fair value and should not exceed the lowest of ‘market value’ or break-up’ value.

    5) Selling such sick companies would not only help banks increase lending but also increase the output from the affected companies, thus adding to the overall growth of the economy.


    1) Many argue that RBI’s policy is utopian. The central bank knows that commercial banks will not be able to run companies, especially since they did not have the foresight to avoid lending money to such companies that were going to default.

    2) Banks may also find it difficult to find buyers for such companies. When banks convert debt to equity at low prices (valuation), the equity capital will bloat, making it difficult to service.

    3) RBI’s measures may work in cases where promoters are wilful defaulters. But in cases where the entire sector is in stress, there is nothing that existing promoters, bankers or the new promoters can do unless the overall economy picks up.

    4) A wilful defaulter is one who knows that he can bypass the system or generally has the muscle to take on the system. Snatching away his company will not be as easy as it seems. He can get bankers in a legal tangle which will delay the entire process.

    5) Consider a large corporate with deep pockets which is willing to buy a company for its assets (say mines). The value at which it will be buying these assets will be ridiculously low. Share price of such defaulting companies are generally beaten down and their break-up value (which is the book value per share adjusted for cash flows and financials) would also be very low. In fact, RBI has said that if the latest balance sheet is not available then the break-up value shall be Re 1. This means that the buyer of the company will be able to get the asset at a very low cost. Banks would barely be able to recover their money, but the buyer, if he plays the capital structuring game right (merge the sick company at low valuations into its own company) would be a huge beneficiary.

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