Reserve Bank widens market for sale of stressed assets

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In a bid to improve the sale of bad loans by lenders, the Reserve Bank of India has allowed banks to sell these assets to other banks, non-banking financial companies (NBFCs) or financial institutions. It has also made banks’ boards more accountable for stress resolution.

“Prospective buyers need not be restricted to SCs/RCs (securitisation companies/reconstruction companies). Banks may also offer the assets to other banks/NBFCs/FIs, etc, who have the necessary capital and expertise in resolving stressed assets,” said RBI.

The RBI believes this will lead to better price discovery, and to attract more buyers lenders have been asked to follow the e-auction process. Prospective buyers should also be given a minimum of two weeks for due-diligence and in case the exposure is above Rs 50 crore, then banks need to get at least two external valuation reports.

The head of banking and finance practice with an international advisory firm said while the intent was good, it was more an effort to regularise the process by specifying rules for asset sale. But, instead of leaving it to bank boards to decide on the valuation framework, the regulator could specify the standard policy for asset sale.

To expedite the process, RBI has nudged banks to use the “Swiss challenge method” to sell non-performing loans of recent vintage. Under this method, an entity (bank or lender) that receives an unsolicited bid for an asset or project has to publish the bid and invite third parties to match or exceed it. The entity that submits the unsolicited bid will be allowed to match or better the ensuing best bid.

RBI has decided to restrict banks’ investment in security receipts (SRs) backed by their own stressed assets. This is being done to ensure that there is “true sale of assets,” said RBI.  The central bank has said from April 1, 2017, when SRs’ value is above 50 per cent of the amount of assets sold, banks need to make higher provisioning that should either be the net asset value declared by the SCs/RCs or provisioning as if it was a direct loan. However, from April 1, 2018, the threshold will be reduced to 10 per cent.

These ARCs or SCs will also have the first right of refusal in case they have already acquired a significant share, 25-30 per cent, of the asset.

Lenders have been asked to set up a board for early recognition and sale of assets, which must conduct periodic review at least once a year, and the board needs to be involved in the entire sale process, RBI said.

According to the norms, banks need to adopt a “top-down” process, which means their head offices will be involved in identification of the assets. This is in line with several steps taken by RBI to tackle rising stressed loans, which at the end of the quarter ended June stood at 12 per cent of the total advances.

Source: http://www.business-standard.com/article/finance/reserve-bank-widens-market-for-sale-of-stressed-assets-116090101033_1.html

Stressed asset business ready to take off

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Companies in the distressed assets business have patiently waited for close to a decade to strike gold but got regularly sidestepped by banks that won’t part with their lemons at a reasonable rate.

The wait could come to an end soon, as the burgeoning bad debt burden and their humongous provisioning requirement is putting capital-starved banks in serious jeopardy, with no resolution in sight. The word has spread, bringing in its wake an army of globally savvy vulture funds that are sweeping down to get a chunk of the share.

These investors have ready cash and the government is on their side, allowing the sponsors to hold 100 per cent in a fund, and arming them with the Bankruptcy Code that would give the firms and banks power to wind down a company in mere 180 days, say sector watchers.
Banks, though, are still resisting, sometimes with such unreasonable demands like asking for 100 per cent of the principal amount or more, to offload the bad debt. But, experts say, unless banks become experts in recovering their dues themselves, the lenders won’t be able to hold for long.

“Banks have to offload the bad debts in the market but it remains to be seen how the market emerges,” said Birendra Kumar, managing director (MD) of International Asset Reconstruction Co.

Following the Reserve Bank’s (RBI’s) asset classification norm, a bank has to categorise a stressed loan as a loss and provide an amount equal to it on their books if it remains so for more than three years (provisions increase progressively from 15 per cent to 25 per cent, 40 per cent and then 100 per cent, depending on the age of the bad debt).

“Banks know they can hold the assets for one or two years only. After three-four years, they will have to get rid of it anyway. Otherwise, they not only incur heavy provisions; the assets also lose their viability,” said Siby Antony, MD at Edelweiss ARC.

Bad debts in Indian banks have worsened progressively in the past few years and are now at about Rs 6 lakh crore, up from Rs 4.5 lakh crore in December 2015 and Rs 2.52 lakh crore in December 2013. In the interim, the minimum provisioning requirement has gone up from five per cent to 15 per cent, and capital infusion by the government is not even enough to cover the total capital erosion that banks have witnessed.

TIME TO CLEAR DEBTS
  • Banking sector NPA stood at Rs 5.94 lakh crore in March 2016
  • There are 15 asset reconstruction companies in India; 10, or more  applications awaiting approval
  • RBI directed asset reconstruction companies to pay 15% in cash and rest in security receipts
  • Experts predict emergence of  cash deals
  • Recently, Brookfield and SBI floated $1-billion stressed funds
  • The govt has also directed banks to float distressed funds
  • Bankruptcy Code will give more teeth to recovery

While it is true that Indian banks have managed to recover and upgrade some of the loans, this is not even 15 per cent of the total stress. And, much of the book clean-up has been done by selling the assets to asset reconstruction companies (ARCs).

Typically, ARCs issue security receipts (SRs) to banks and pay about 15 per cent of the asset price upfront. They then act as an agent for banks to recover the dues, earning a spread. ARCs can also buy assets upfront and recover the dues for themselves but that is hardly followed in India. However, this practice could change, with distress funds from round the world setting up shop in India with a deep pocket, ready to buy assets in all-cash deals. According to Birendra Kumar, banks are now reluctant on selling assets on SR basis, as it takes years to recover the due, but the cash discounts offered by the banks is not good enough to attract buyers of stressed assets.

“It would continue to be a mix of SRs and cash. Global players would generally prefer to buy on cash basis, and banks in such situations will have to offer a higher discount,” said Kumar.

According to various estimates, in India, banks sell stressed assets at not more than a 40-45 per cent discount. In the case of a cash deal, globally the practice is to sell assets at not more than 25-30 per cent of the value. “The current size of the ARC industry is a matter of conjecture, given the lack of authoritative data. However, based on the agency’s discussions with market participants, it is understood that SRs are outstanding to the tune of Rs 60,000 crore, backed by NPAs (non-performing assets) close to Rs 1 lakh crore as at end-March 2016,” says a report from India Ratings (Ind-Ra).

About 71.4 per cent of the SRs rated by Ind-Ra belong to the small and medium enterprises segment. Large corporates constitute 9.6 per cent and retail (individuals) account for 19 per cent.So far, 15 ARCs have been given a licence by RBI and at least 10 more are pending with the central bank. Global vulture funds and stressed fund specialists like JC Flowers & Co, Eight Capital Management LLC, SSG and KKR are partnering with domestic firms such as Ambit Holdings, Piramal, etc, for the ARC business. Besides, Brookfield Asset Management, a stressed funds specialist, in partnership with the country’s largest lender, State Bank of India (SBI), is floating a fund to take advantage of the distressed market. The Brookfield-SBI venture has committed $1 billion to start with, underscoring the market’s potential.

Meanwhile, the existing ARCs continue to suffer from lack of capital and the stipulation that assets can be purchased only after paying up at least 15 per cent upfront. This has limited their ability to take large exposure.

“The challenges the older ARCs face are inadequate capital and specialist management expertise to drive turnarounds of acquired stressed assets. The ARC industry has capital of $400-500 million, with the total of stressed assets in the banking sector estimated to be $130 billion,” said Nikhil Shah, the MD at Alvarez & Marsal India, a turnaround specialist. Shah says the new funds that are coming to India will change the game in favour of asset resolution.

“The older ARCs have not demonstrated capability in reviving acquired stressed businesses. The new entrants are expected to be more aggressive in implementing measures like management changes and deploying significant primary capital in the businesses to improve value,” he added.

“The Bankruptcy Code, with its time-bound resolution, will provide ARCs and stressed assets funds more teeth to execute changes in a shorter time frame.”

However, Antony of Edelweiss ARC does not believe the new stressed fund managers would do something drastically different. “With the new relaxation in the Budget, where the government allowed sponsors to hold up to 100 per cent stake in an ARC and allowing 100 per cent foreign direct investment in ARCs via automatic route, the capital issue of ARCs have been addressed,” said Siby of Edelweiss, adding the legal structure is also getting fixed and that will allow stressed funds to grow exponentially. Now, if only banks would listen to reason and lower their prices for stressed funds, a flurry of activity in India’s stressed assets market would become the norm.

 

Source: http://www.business-standard.com/article/finance/stressed-asset-business-ready-to-take-off-116072801716_1.html

Submit data on loan defaulters to credit information firms, RBI tells banks

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The Reserve Bank of India has advised banks and financial institutions to submit data on defaulting borrowers from December 2014 onwards to Credit Information Companies (CICs) and not to the RBI.

Releasing this information, obtained through a portal complaint, Delhi-based Right to Information activist Subhash Chandra Agrawal said on Friday that it is significant to note that the RBI has not so far complied with the Supreme Court order of December 12, 2015, in the RBI vs PP Kapoor (Civil 94 of 2015) case, where it wanted the RBI to make public details of the top 100 loan defaulters among industrialists.

The details required including the names of the businessmen, firm name, principal amount, interest amount, date of default, and date of availing the loan.

In a June 24 letter addressed to Agrawal in response to his PG Portal complaint dated April 24, the RBI said it has submitted to the Supreme Court a list of defaulters above Rs. 500 crore in a sealed cover and claimed that the said information is confidential and requested that it may not be revealed to the public.

The matter is still under consideration of the Supreme Court.

Source: http://www.thehindubusinessline.com/money-and-banking/submit-data-on-loan-defaulters-to-credit-information-firms-rbi-tells-banks/article8797928.ece

SEBI cross with UB over Mallya’s board seat

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The Securities and Exchange Board of India (Sebi) is not pleased with United Breweries (UB) allowing Vijay Mallya to continue on its board of directors, despite being tagged a wilful defaulter.

Mallya is chairman of the board of Bengaluru-based UB. Several banks have formally declared him a wilful defaulter and under new Sebi norms (late last month), any individual so tagged is barred from holding a board position in a listed company.

“Mallya should have stepped down as UB chairman and from its board, following Sebi’s new regulations. (We) are keeping a watch on the board functioning,” said a Sebi official, requesting anonymity.

IN TROUBLED WATERS

SEBI’s new curbs on wilful defaulters

  • New rule bans wilful defaulters from taking any board positions
  • Disallow defaulters from setting up market intermediaries
  • Defaulters would not be allowed to take control of other listed company
  • No wilful defaulter shall make a public announcement of an open offer for acquiring shares or enter into any transaction
  • Sebi’s rule disqualifies Mallya from various posts he holds at the moment

The regulator could soon initiate action if UB is in violation of the corporate governance norms, said the official. The regulator is believed to have also raised questions on the role of independent directors on UB’s board.

UB refused to comment on an email query sent to it.

Earlier this year, Mallya had resigned as chairman and managing director of United Spirits, as part of a deal with the company’s new owner, Diageo. Mallya, however, continued to serve on the board of other companies, including UB. Diageo now owns 55 per cent of USL and Mallya had stepped down from the board in February, for a $75 million payoff.

From the March quarter shareholding data, Mallya holds 8.08 per cent in UB in his personal capacity. Another 22 per cent in UB is owned by his group companies.

Heineken acquired a 37.5 per cent stake in United Breweries in 2008 through its takeover of Scottish & Newcastle and has since increased its holding to 42.4 per cent.

The banks say Mallya had given personal guarantees, apart from pledging his stake in UB Group companies, to raise funds for his now-grounded Kingfisher airline. This resulted in Mallya losing control over his liquor empire to global players — Diageo in spirits and Heineken in beverages.

Mallya reportedly left India on March 2, allegedly to escape enforcement action by multiple probe agencies and Indian banks, to which he owes Rs 6,963 crore in loans. In March, a consortium of lender approached the Supreme Court to stop Mallya from going abroad but he’d left; on April 18, a court in Mumbai issued a non-bailable arrest warrant against him.

Last week, the enforcement directorate had attached United Breweries Holdings and Mallya assets worth Rs 1,411 crore in Mumbai, Bengaluru, Coorg and Chennai. He was also declared a proclaimed offender early this week.

This was issued in response to a plea by the Enforcement Directorate on April 15 before the special court hearing cases under the Prevention of Money Laundering Act, 2002. There were allegations on him that he transferred Rs 4,000 crore ($590 million) to tax havens.

Source: http://www.business-standard.com/article/markets/sebi-cross-with-ub-over-mallya-s-board-seat-116061600885_1.html

Cash crunch: How customers came to owe banks more than what they were loaned

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More than a thousand borrowers have outstandings that are substantially larger than the amounts sanctioned to them by banks, data sourced from Reserve Bank of India (RBI) shows. The total outstandings of 1,131 borrowers, at Rs 1,09,909 crore, were 150% more than the amount sanctioned, as on March 2016, data accessed by FE reveal. At the end of December 2015, the outstandings were Rs 90,235 crore.

Bankers and ex-bankers that FE reached out to attributed the pile-up in outstandings to short-term requirements of borrowers that were met by banks to help them tide over a cash crunch. Overdue interest, they said, could be another cause for the high outstandings. One senior banker observed that there were occasions when the capacity of the borrower to repay the additional amount was not assessed properly. “At times, limits get exceeded without a proper assessment of the customer’s ability to service the loan,” he said.

A former executive director of a public sector bank said one reason for the actual outstanding exceeding the permitted limits was that lenders tended to sanction ad hoc non-funded letters of credit (LC) even before the limits were okayed by the consortium. “Sometimes ad hoc LCs are opened for amounts which are bigger than those agreed to by the consortium. Since consortiums take anywhere between six months and a year to sanction limits, the money is disbursed since business cannot wait,” he explained, adding that such loans serve as working capital.

A former chairman of a state-owned bank said if the customer was unable to service the loan, the interest piled up pushing up the outstanding amount. “If the interest hasn’t been paid for three or four years, the amounts can become large,” he pointed out.

An RBI document on the Central Repository of Information on Large Credits notes that if outstanding loans exceed 150% of the limit, a “warning message should be displayed to the user on generation of the instance document”.

Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services, observed the main reason for the outstandings surpassing the sanctions was “temporary accommodation and loans against receivables”.

Parekh explained that at times borrowers approached banks for funds to be able to take delivery of imports. “The customer promises to pay back the amount from receivables so bankers do accommodate such requests,” he said.
Total non-performing assets (NPAs) of the banking system stood at Rs 5.8 lakh crore at the end of March 2016 and total provisions were Rs 1.43 lakh crore.

The central bank has been trying to help banks tackle bad loans by allowing them to convert debt into equity and more recently into convertible redeemable preference shares. However, banks have not been able to find buyers for any of the assets under strategic debt restructuring scheme.

FE had earlier reported that bank loans that aren’t NPAs just yet but could turn toxic amount to over Rs 6 lakh crore or close to 9% of total advances, citing RBI data. The total troubled loans of Rs 6,24,119 crore at the end of December 2015 were 9% higher than the Rs 5, 73,381 crore at the end of June 2015.

While Rs 3,06,180 crore worth of loans were classified in the SMA-1 category where repayments are overdue between 30 and 60 days, another Rs 3,17,939 crore was in the SMA-2 category where repayments are overdue between 60 and 90 days. These Special Mention Accounts follow a fiat from the RBI in 2014 asking banks to put in place a mechanism to red-flag troubled loan accounts early in the day so that these could be dealt with speedily. If the loan is not serviced after 90 days it must be classified as an NPA.

 

Source: http://www.financialexpress.com/article/industry/banking-finance/cash-crunch-how-customers-came-to-owe-banks-more-than-what-they-were-loaned/285239/

After Italy & Greece, PE seeks to partner Indian lenders for bad loan portfolio

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Storied asset manager KKR & Co has approached lenders like State Bank of India and ICICI Bank with a proposal to manage and create value from their loan portfolios to under-performing Indian companies. The American private equity investor will build a platform to deploy fairly long-term capital and operational expertise to turnaround troubled assets, with banks on board sharing the future upsides.

 

The proposal – discussed with a few public and private sector banks – is modelled on Pillarstone, a similar European platform created by KKR for stressed loans in markets like Greece and Italy . India’s central bank governor Raghuram Rajan has pushed lenders to purge bad loans and has urged global alternate asset managers to play a bigger role in easing India Inc’s bad loan crisis. But most Indian banks have opted for ‘fire sale’ of stressed assets to rival corporate houses rather than staying on course with a turnaround plan, though it would help these lenders unlock better value eventually.

“They are talking about jointly managing a portfolio of loans to these stressed companies as against acquiring a one-off asset. It involves sweating underlying assets to generate more value rather than writing down. This is also different than the prevailing approach by the under-capitalized asset reconstruction companies, which is more focused on asset-stripping,” said a source directly familiar with the matter. The discussions are ongoing but may not lead to any conclusive agreement with KKR, a second source cautioned.

When contacted, KKR declined to comment on the story. SBI and ICICI Bank too offered no comments. Traditionally, India’s public sector banks have stayed away from dealing with foreign investors in the stressed loan market.

Bulge-bracket global funds such as KKR, Brookfield Asset Management and Apollo Global management have looked at opportunities to acquire stressed assets put on the block by lenders. KKR was in contention to acquire Jaypee’s cement units, which was clinched by Aditya Birla-led UltraTech Cements for Rs 16,000 crore, mostly through a refinancing deal. KKR’s offer centred around acquiring 51% ownership (leaving the rest with lenders) and turning around operations under a new management team. The lenders would recoup a part of the loan upfront, while waiting for future upsides riding on a business rejig. The banks preferred a one-time deal offered by Birla’s UltraTech.

Brookfield’s acquisition of debt-laden Gammon’s road and power assets is one of the few recent instances where a global investor acquired assets of a stressed entity. “Indian lenders have opted for selling assets in distress rather than exploring ways to shore up value on troubled loans. Yesterday’s lenders have become today’s collectors. Hopefully, there will be a time when bankers will behave like bankers,” Anil Singhvi, a shareholder activist and co-founder of proxy advisory firm Institutional Investor Advisory Services (IIAS), said.

Last year, KKR along with Italian lenders UniCredit and Intesa Sanpaolo launched Pillarstone as a platform to help big corporate borrowers recover and grow. It later signed up with lenders such as Alpha Bank and Eurobank to expand the platform into Greece. Both Italian and Greek lenders have agreed to pool in about EUR 1 billion of loans each as part of the engagement with Pillarstone. KKR has said European Bank for Reconstruction and Development is also considering co-investing in the platform, which is planning to start operations into other European markets.

KKR has argued that Pillarstone is a “timely intervention” in European markets where hefty bad loans are hampering a broader economic recovery, a concern shared by policymakers in India as well. In recent weeks, the top 20 public sector banks have reported a cumulative loss of almost Rs 15,000 crore in the fourth quarter of the last fiscal. This was triggered by an unprecedented surge in provisioning for bad loans following the RBI’s asset quality review. The non-performing assets on their balance sheets is estimated at Rs 3 lakh crore.

“Nearly 15% of system assets are stressed and even if we optimistically assume that only a third of these stressed assets are going to be ultimately written off, that still means that nearly 30% the shareholders’ equity in the banking system is currently at serious risk,” Saurabh Mukherjea of Ambit Capital said in his latest research report. “The problem-facing public sector banks is more serious as 17% of their assets are stressed. It would imply that nearly 50% of the shareholders’ equity of PSBs will be written off by the end of FY18, requiring $30 billion (equivalent to nearly 1.5% of our GDP) in equity infusion. It is unlikely the government will find resources to recapitalize these ailing public sector banks,” Mukherjea added.

Source:http://economictimes.indiatimes.com/articleshow/52634610.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

 

New bankruptcy bill to speed up shutdown of failed businesses

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Panel has sought the overhaul of the bankruptcy framework to allow the speedy winding up of failed businesses to protect shareholders and lenders, aiming to modernise an outdated system.

A government panel has sought the overhaul of the bankruptcy framework to allow the speedy winding up of failed businesses to protect shareholders and lenders, aiming to modernise an outdated system that drags out closure proceedings.

It has recommended new institutions and structures for a fresh regime that will encourage entrepreneurship and foster a startup culture, among the stated objectives of the Narendra Modi administration. The government has indicated it will move a Bill in the winter session of Parliament to give effect to the recommendations, addressing one of the key issues that has kept India low on the ease of doing business rankings.

The Bankruptcy Law Reform Commission headed by former law secretary TK Viswanathan has proposed insolvency resolution within 180 days and a new regulator to oversee the process. It’s also laid down a clear and speedy system for early identification of financial distress and revival of companies.

The timelines are on par with international norms for insolvency resolution. “The endeavour would be to introduce the Bill in the next session of Parliament,” Finance Minister Arun Jaitley said at the World Economic Forum in the Capital on Wednesday. Viswanathan submitted the report to the minister later in the day. The report, along with the draft legislation, has been made public for feedback. “The Bill seeks to improve the handling of conflicts between creditors and debtors, avoid destruction of value, distinguish malfeasance vis-a-vis business failure and clearly allocate losses in macroeconomic downturns,” the report said.

The World Bank has ranked India at 136 out of 189 countries in ‘resolving insolvency,’ estimating that it takes 4.3 years on average in Mumbai to settle a case.

Jaitley had identified bankruptcy law reform as a key priority for improving ease of doing business in his February budget speech. He said that a comprehensive bankruptcy code, meeting global standards and providing the necessary judicial capacity, would be unveiled in the fiscal year. Under the current system, proceedings take several years, hurting investors and lenders besides costing taxpayers crores of rupees.

Banks are groaning under bad debt stemming from projects that have got stuck, drawing the Reserve Bank of India’s concern. “We need a bankruptcy code. We need equity to be seen as equity and debt to be seen as debt. Today there’s a lot of confusion… We need that confusion to be changed,” RBI Governor Raghuram Rajan has said previously.

90 Days for Key Categories. The prescribed resolution timeline of 180 days can be cut further to 90 days from the trigger date for key categories. The proposed insolvency regulator will cover professionals and agencies specialising in the field.

The proposals include information utilities that will collect, authenticate and disseminate financial information from listed companies. An Insolvency Adjudicating Authority will hear cases by or against debtors. The Debt Recovery Tribunal should be the adjudicating authority with jurisdiction over individuals and unlimited liability partnership firms, it said. The National Company Law Tribunal (NCLT) should be the adjudicating authority with jurisdiction over companies and limited liability entities, it added.

The draft bill has consolidated existing rules relating to insolvency of companies, limited liability entities, unlimited liability partnerships and individuals, all of which are currently scattered across a number of laws, into a single legislation.

According to the draft bill, during the transition phase, the Centre will exercise all regulatory powers until the agency is established. The panel’s report suggests that an insolvency resolution plan prepared by a resolution professional has to be approved by a majority of 75% of the voting share of financial creditors. As part of the insolvency resolution process, creditors and debtors will engage in negotiations to arrive at agreeable repayment plans.

The draft proposes that any proceeding pending before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) or the Board for Industrial and Financial Reconstruction (BIFR) before the new law goes into force should stand abated or stopped.

“However, a company in respect of which such proceeding stands abated may make a reference to Adjudicating Authority within 180 days from the commencement of this law,” the recommendation said, keeping in view continuity of the process. Minister of State for Finance Jayant Sinha said the required infrastructure needed to be put in place.

“We also have to ensure that necessary judicial capacity is available,” he said. “We also need to resolve many of the situations immediately because they are short of cash in most of these bankruptcy types of cases.” The minister said the government was trying to put together a comprehensive solution where “we can resolve default and bankruptcy cases as quickly and efficiently possible.”

Industry feels the new system will create a robust and globally competitive insolvency regime. This will significantly reduce the time taken for insolvency proceedings in India, which at present, on an average basis is estimated at about 4.3 years as against only 1.7 years in high-income OECD countries,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry.

“The architecture proposed by the Viswanathan committee of establishing an insolvency regulator to have oversight of the new class of insolvency professionals, agencies and information utilities will enhance the systemic efficiency of dealing with insolvency cases in a timebound manner,” he said.

Source: http://articles.economictimes.indiatimes.com/2015-11-05/news/68043912_1_bankruptcy-framework-new-bankruptcy-bill-180-days