Chidambaram talks tough on loan defaulters

Finance minister P. Chidambaram met chiefs of public sector banks and
 other financial institutions in New Delhi on Monday. Photo: Indranil Bhoumik/Mint
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Chidambaram asks banks to take all necessary steps to recover dues without hurting industry

New Delhi/Mumbai: The government on Monday sent a strong message to loan defaulters and served notice on promoters of debt-laden companies that they needed to infuse funds into their businesses to revive them and pay back the money owed to banks.

In a meeting with chiefs of public sector banks and other financial institutions in New Delhi on Monday, finance minister P. Chidambaram asked banks to take all necessary steps to recover dues without hurting industry.

“While we understand why NPAs (non-performing assets) have risen and why the restructuring of loans have increased, we also wish the banks take strong steps to recover their dues,” he said. “I think the promoters have a duty to bring in additional money and the companies have a duty to pay back the loans. We cannot have an affluent promoter and a sick company.”

Chidambaram added that steps taken by banks have started showing results with recoveries improving last month.

The finance minister’s warning comes at a time when the banking system has been getting squeezed by a sharp increase in NPAs, and lenders have been forced to undertake large-scale restructuring as economic growth is set to slow to a decade’s low of 5% in the current fiscal year.

The gross NPAs of 40 listed Indian banks increased to Rs.1.79 trillion from Rs.1.25 trillion in December, up 43.1% from the year-ago period. Debt recasts by banks are also on the rise at a faster pace as companies find themselves increasingly unable to repay their loans on time.

Until December, Indian banks have recast more than Rs.2 trillion under the so-called corporate debt restructuring (CDR) mechanism. Under CDR, banks typically stretch the repayment period to stressed companies, offer a moratorium, and reduce lending rates.

The total amount of such recasts may be about twice that as banks also extensively undertake bilateral restructuring outside CDR. Though there are no aggregate numbers available for this, such recasts are estimated to be nearly equal to the CDR figure.

Analysts expect at least 25-30% of such loans to turn bad, unlike about 10-15% that did so in the aftermath of the 2008 global financial crisis, when the Reserve Bank of India (RBI) sharply reversed the monetary stance by cutting rates to boost the economy. This time, however, RBI has been cautious in cutting rates due to high inflation. The central bank will announce its next monetary policy review on Tuesday.

Increases in NPAs and debt recasts impact banks’ profitability as they need to set aside more money for this in the form of provisions.

Mirroring the increasing pace of recasts, in the October-December quarter alone, banks restructuredRs.24,584 crore of loans, up from the Rs.19,544 crore in the previous quarter, to reach Rs.2.12 trillion.

In the current fiscal year so far, banks have recast Rs.62,085 crore under CDR, around 50% more than the whole of last year. Iron and steel is the single largest sector that has undergone CDR, constituting 23% as of December, followed by infrastructure (9.3%), textiles (8.24%), construction (7.3%) and telecom (5%).

Most airline loan recasts are outside CDR, as with grounded Kingfisher Airlines Ltd.

Chidambaram’s pointed remark about sick companies and affluent promoters may be significant with respect to the Vijay Mallya-promoted airline, which hasn’t flown since 1 October.

Kingfisher, which owes banks around Rs.7,000 crore, has been in talks with banks for further debt restructuring. But the banks, led by State Bank of India (SBI), are seeking to recover their money and want the promoters to infuse funds into the airline before a further loan recast is considered.

The bank is taking all steps to recover its loans provided to Kingfisher, SBI chairman Pratip Chaudhurisaid after the meeting.

“We are blazing all guns and taking all steps to recover (Kingfisher’s loans),” he said. “There is a core group. They are assessing what are securities, what can be disposed of quickly, then they are put on auction... That is how it goes.”

Kingfisher Airlines has pledged assets ranging from its brand to office furniture for Rs.7,500 crore against bank loans. The assets, including a villa in Goa, two helicopters, Kingfisher House in Mumbai and shares, have been shown as collateral for loans as of November 2011, minister of state for finance Namo Narain Meena told Parliament in December 2011.

Wilful defaulters

In the past, Indian banks have raised the alarm about a large number of companies misusing the restructuring facility even when there was no genuine need for a debt recast. To curb misuse, banks have been demanding a greater contribution from promoters to ensure that they continue to remain committed to the restructured assets.

RBI, too, has taken steps in this regard. In its draft guidelines on restructuring issued in January, the central bank stipulated that promoters’ contribution for such deals should be prescribed at a minimum of 15% of the diminution in fair value or 2% of the restructured debt, whichever is higher.

Banks can demand more than this from promoters, depending on the risk associated with the project and their ability to bring in a higher amount, RBI had said. This would be insisted upon in larger accounts, especially CDR cases. The central bank is currently working on the final guidelines.

Banks will take all steps under the law to recover funds from wilful defaulters, Rajiv Takru, secretary, financial services, said on Monday after the finance minister’s meeting with bank chiefs.

“(If) the promoter is holding onto money and the company is in trouble, won’t we expect that he puts some money into the company? Why should banks keep on restructuring and pump more and more money into the company,” he said. “There is security, there is collateral, there are personal guarantees. If the banks have to use these methods, they will use. After all, they are meant for a purpose.”

But the government sought to assure borrowers that the recovery drive will not impact those in distress.

“Banks are trying to make a distinction between wilful defaulters and people who are genuinely stressed and have genuine problems. Anybody who is genuinely stressed will get due consideration,” Takru said. “But anybody who is a wilful defaulter will need to repay. If the system needs to get tough with them, it will.”

Vaibhav Agarwal, a research analyst at Angel Broking Ltd, said, “The RBI restructuring guidelines stipulate that promoters need to bring in more contribution in case they want to restructure loans due to repayment difficulties. The statement (by Chidambaram) indicates possible efforts to streamline guidelines, which will allow banks to monetize promoters’ personal guarantees in the event of loan default.”

Separately, in an interview broadcast on Bloomberg TV India, the finance minister said concerns about retrospective taxation will be addressed once the tax dispute with Vodafone Group Plc is resolved. Once the case is settled, the government would be in a position to go back to Parliament to amend a provision on retrospective taxation, Chidambaram said in the interview.

Chidambaram downplayed concerns over a raft of transfer pricing cases, saying: “Merely because a few transfer pricing cases have arisen in a short spell of time, it doesn’t mean that we are doing anything extraordinary or anything that is unjust or harsh.”

PTI contributed to this story.