Only a dozen large firms to gain from bank loans recast, most stressed firms not eligible

According to bankers, total debt recast will be around Rs 3 lakh crore. Shapoorji Pallonji, Future groups among firms to receive nod for recast, but may ultimately not need it.

Representational image | Photo: Dhiraj Singh | Bloomberg

Mumbai: The much-hyped one-time debt recast scheme announced by the Reserve Bank of India last year failed to attract much response, with only around a dozen companies having a debt of over Rs 1,500 crore opting for loan restructuring by commercial banks.

According to bankers, the total debt recast of the corporate sector will be around Rs 2 lakh crore to Rs 3 lakh crore. The scheme was applicable until 31 December 2020.

The Shapoorji Pallonji Group and Kishore Biyani’s Future Group are among the companies that received banks’ nod for the recast.

Bankers said apart from these two groups, some of the thermal power plants have also sought to restructure their debt. “These thermal power plants are having cash flow problems because there is a delay in payment from discoms [power distribution companies],” said the chief executive of a commercial bank.

However, the central bank expects bad loans to rise as stringent norms to recast the loans made most large borrowers ineligible for the scheme.

The Shapoorji and Future cases

While banks have agreed to restructure the loans of Future Group, the firm may not need the dispensation if its deal with Reliance Industries goes through. Reliance Industries has proposed to acquire the retail, wholesale, logistics, and warehousing businesses of Future Group for Rs 24,713 crore.

“For Future group, the restructuring is a plan B, in case the Reliance deal does not go through for some reason. If the deal happens then there is no restructuring required,” said the bank executive quoted above.

“Similarly, the Shapoorji group is also sitting on lots of money but there is the Tata issue. Whether these two accounts really need debt recast or not, we will come to know in the next 2-3 months,” the executive added.

Shapoorji Pallonji, which has a debt of Rs 10,900 crore, decided to restructure the loan after Tata Sons moved Supreme Court to block the group’s plan to pledge a portion of its 18.37 per cent stake in Tata Sons, valued at over Rs 1.78 lakh crore, to raise Rs 11,000 crore.

“We are not seeing any major damage from the corporate sector. There are very few cases where there is a real issue. So overall only 10-12 big accounts are there,” the banker said.

“Most banks have indicated that their restructuring book will be 2-3 per cent, which amounts roughly to Rs 2 lakh crore to Rs 3 lakh crore for the banking system,” the banker added.

Why scheme has seen dull response

Bankers said some of the companies from industries — like hospitality — that are badly hit due to Covid-19 have applied for debt recast but the loans of these firms are mostly below Rs 500 crore.

According to RBI’s one-time debt recast norms announced in September 2020, banks have to take approval of a committee headed by veteran banker K.V. Kamath to restructure loans above Rs 1,500 crore.

Bankers said the stringent norms set by the Kamath panel are also behind the dull response at the system level to the scheme.

One of the parameters recommended by the panel for a company to be eligible for recast was a debt service coverage ratio (DSCR) at 1.0 and above. DSCR indicates the debt servicing capacity of the borrower. It is defined as addition of net cash accruals for the relevant year, along with interest and finance charges, divided by addition of the current portion of long-term debt with interest and finance charges.

This means the cash flow of the borrowers needs to be more than what is required to service debt.

“If the cash flow is positive then why would a company avail debt recast,” said another chief executive of a commercial bank. As a result of these norms, many companies were ineligible for loan restructuring.

Bad loans set to rise

Since companies that were hit financially due to the pandemic were unable to restructure debt, non-performing assets (NPA) of the banking system are set to rise.

In its Financial Stability Report released Monday, the RBI projected gross NPA (GNPA) of banks to rise from 7.5 per cent in September 2020 to 13.5 per cent in September 2021 under the base case scenario and to 14.8 per cent under a severe stressed scenario.

The central bank observed that the numbers could change depending on how the one-time restructuring window was utilised by the banks.

“These GNPA projections are indicative of the possible economic impairment latent in banks’ portfolios, with implications for capital planning. A caveat is in order, though: considering the uncertainty regarding the unfolding economic outlook, and the extent to which regulatory dispensation under restructuring is utilised, the projected ratios are susceptible to change in a nonlinear fashion,” the RBI said.