PSU Banks Rally On RBI’s New Debt Recast Rules

The Reserve Bank of India came out with a new scheme called Sustainable Structuring of Stressed Assets for lenders restructuring large stressed loans (over Rs 500 crore). Analysts said the move could allow banks to more effectively manage bad loans, leading to sharp gains in PSU banking stocks.

Here are 10 things to know:

1) Under the scheme, lenders can segregate stressed loans into two parts – sustainable and unsustainable. The sustainable part is something, which lenders think that a borrower can service with its existing free cash flows (cash remaining after providing for maintenance of existing business and future expansion).

2) The remaining part, called unsustainable part, could be converted into equity or equity like instruments like preference share or compulsorily convertible debentures.

3) For this scheme to be applicable, the sustainable part should be more than 50 per cent of the total loan outstanding, RBI said.

4) Bankers said the new rule is a better option than the current setup, which involves selling the stressed loans at a much lower price. That’s because bankers have the option to recover their loans if the business turns around under the new rules. Under old rules, which involved the outright selling of assets to reconstruction companies, such recovery was not possible.

5) The scheme scores over SDR (Strategic Debt Restructuring) because it does not involve a management change in the company (whose debt is restructured). In the case of SDR, banks have to appoint a new management within 18 months, said BK Batra, deputy managing director at IDBI Bank. Under the new rule, existing promoters of large borrower companies are allowed to continue if they give up their stake in the same proportion as that of the unsustainable part of total loan outstanding.

6) The new rule is also likely to result in increased provisioning because banks are required to provide either 20 per cent of the total outstanding debt or 40 per cent of the unsustainable part, whichever is higher. Earlier banks were required to make a provision for 15 per cent of the outstanding loan amount. However, in this case banks have an option to upgrade both the sustainable and unsustainable part of the loans to standard assets after one year of satisfactory performance, which will result in reduced provisioning.

7) According to Bank of America Merill Lynch, the new scheme will be positive for larger banks in the longer term.

8) This scheme will attract those corporate who are not able to service their debt due to weak cash flow or are unable to raise fresh equity due to poor valuations. Under this scheme, corporates will have to pay interest only on the sustainable part, which will reduce their interest liability.

9) Due to the improved financial health after restructuring, news investors could be interested to invest in those companies.

10) Domestic brokerage Religare said this rule will benefit companies which are under severe stress and are highly leveraged.

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Source:Ndtv