Banks will now be able to convert loans into shares for taking over firms from truant borrowers
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Banks will soon have the power to convert loans into shares for taking over companies from truant borrowers while promoters who step in to turn around projects will have some breathing space. Lenders will be allowed to hold as much as 30% equity in a company and insert a conversion clause in loan documents — a move that could make it easier for a banking consortium to not only force an existing management to fall in line but also bring about a management change. "Sebi and RBI are discussing the details of the conversion price. Sebi, of course, is worried about the minority shareholders and RBI is interested in making sure banks do not convert at too high a price," said governor Raghuram Rajan.
Asked whether banks can fund the acquisition of companies that are chronic and wilful defaulters, RBI told the media that the regulator is "not against acquisition funding."
"These measures will encourage promoters with deep pockets to take up projects that are stuck for want of money or clearances,'' says Arundhati Bhattacharya, chairman State Bank of India. Significantly, in projects that have been stalled due to "inadequacies of current promoters", a change in ownership and management may be required to revive the project. In this context, the new promoter will be given additional time and banks will refrain from downgrading and reclassifying the loan account.
"I think we should not attribute stigma to an NPA (nonperforming asset)," said Rajan. "This is a misconception among producers and lenders. Producers think if their account is labelled 'NPA' they are at fault. It only means the account is not paying and there could very legitimate reasons (for that)... it could be because of policy inaction, legal inaction, changes in world prices etc,'' he said.
Rajan said banks are even free to lend to accounts that are classified as NPA. While RBI has extended the accounting flexibility it had given banks for sale of NPAs, bankers say stress loan deals are unlikely to take off in a big way if rules for stress asset firms are not relaxed.
Banks are sitting on Rs 2.72 lakh crore of restructured loans, of which, they fear, more than 30% could turn into NPAs. The infrastructure sector accounts for the bulk of sticky loans, with power and highway projects stuck midway. (Economic Times)
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