India’s highly indebted tycoons and their anxious bankers have long hoped that time, and an economic upturn, would help them escape their debt plight without any painful sacrifices.
However a recent spate of asset sales by overleveraged companies and hints of more to come has raised hopes that Indian businessmen, either voluntarily or under duress, and their lenders are facing up to reality about their debt problems and that a long overdue clean-up of banks’ books is finally under way.
Over the past year, the Reserve Bank of India has stepped up pressure on big corporate debtors to pay up, despite the absence of an effective national bankruptcy law.
Under the leadership of governor Raghuram Rajan, the central bank also has got tough with banks, demanding they make full provisions for all troubled loans, whether or not they are formally classified as non-performing, by the end of March 2017.
“The lack of willingness to deal with problems — that’s changed,” says one senior Mumbai banker, who asked not to be identified. “There has been an enormous change in behaviour. Historically India has made the right decisions with its back to the wall. And we do have our backs to the wall now.”
Stressed assets accounted for an estimated 14 per cent of India’s total banking system as of September, according to the RBI.
The picture is particularly bleak at state-owned banks: stressed assets account for 17 per cent of their total lending, with 6.2 per cent of total loans classified as non-performing. The rest have been restructured, with extended repayment schedules and in many cases additional funds to help keep alive projects that have suffered from delays in clearances and rising costs.
But these restructured loans are actually also considered high-risk, classified as “standard” only because of extreme forbearance by the banks and their regulators.
Until recently, bosses of overleveraged Indian companies had hunkered down in the hope that eventually, given Prime Minister Narendra Modi’s focus on trying to revive stalled infrastructure projects and an improving economy, their fortunes would improve. State-owned banks were also happy to wait, rather than admit loans may never be fully recoverable or launch protracted legal battles to seize assets.
The lack of willingness to deal with problems — that’s changed. There has been an enormous change in behaviour.
But under a strategic debt restructuring scheme revealed by the central bank in June, companies that revise loans must now sign binding contracts that enable their lenders to take over the company if it fails to comply with the new repayment terms.
Officials say the threat of losing control gives company owners a much stronger incentive to find ways to repay, either by selling assets or potentially raising fresh capital.
“Part of the push is coming from the RBI, but companies themselves are realising that they have to start getting their own act together,” says Rajeev Malik, senior economist at CLSA. “They can’t just keep sitting and nursing their wounds and choose not to do anything.”
Ashish Gupta, head of Indian equity research at Credit Suisse, says the pressure from the RBI is facilitating asset sales by bringing values of infrastructure assets on banks’ books to more realistic levels.
“If the assets are not correctly marked to their value, finding a buyer is difficult,” he says. “Once banks start taking provisions, the gap between the book value and fair value narrows and deals become more possible.”
Last month, Jaiprakash Associates sold most of its cement plants to rival UltraTech Cement, part of the Aditya Birla group, for $2.4bn to reduce some of its estimated $11bn gross debt. It raised $1.6bn by selling its hydropower plants 2014.
Also in March, GVK, the Mumbai-based infrastructure company, sold a 33 per cent stake in the eight-year-old Bangalore Airport for $329m to Fairfax Holdings and Fairfax India. GVK, which has gross debt of about $5bn, is now said to be scouting for buyers for three toll road projects.
GMR, another airport and road builder, last month sold a 51 per cent stake in a highway project in Karnataka. It was paid just $12m, but $160m in debt was removed from its books.
Analysts say such transactions are likely to accelerate as India’s economy gains momentum, boosting asset prices and increasing corporate owners’ willingness to let go. Mr Modi’s administration has also introduced a long-awaited new bankruptcy law in Parliament that would significantly strengthen banks’ leverage over delinquent borrowers if passed.
“In the past, promoters [controlling shareholders] had a tremendous amount of leverage in the system,” says a senior government official “They were able to get fresh loans as well as ‘evergreen’ [extend] existing loans. The bankruptcy code will be a game-changer, strengthening the hand of creditors.”
Asset sales will not necessarily improve overleveraged companies’ financial prospects. In fact, they could actually exacerbate difficulties servicing remaining debt, warns Credit Suisse, as it is often the profitable assets, which contribute the most to cash flow, that companies put on the block.
Some economists also fear the aggressive tactics will be so destabilising for banks that they will deter new lending and hurt growth.
But analysts say the sales will help banks by reducing the amount of stressed debt on their balance sheets — something officials hope will eventually spur the fresh lending from public sector banks that is necessary to fuel growth.
Mr Modi and Arun Jaitley, finance minister, are also said to be solidly behind the clean-up effort.
“We’ve never seen this kind of situation,” says one senior banker. “This is the first time that the bankers are so scared. Jaitley and Modi are personally monitoring these banks, making sure that the assets are on sale.”