The finance ministry has directed state-owned banks to get tough with willful defaulters. Promoters of companies seeking corporate debt restructuring (CDR) are likely to be asked for a list of personal assets and these will be charged to the lending banks to ensure that banks have sufficient collateral to cover their loans in case of defaults.
“We have asked banks to look into the issue of non-performing assets (NPA). It is high time they act tough with willful defaulters,” Rajiv Takru, secretary, financial services sector, told HT. There’s more. Banks will have to get valuations done to ensure that the collateral covers the value of the loan.
“There will be fewer willful defaults if promoters know their personal assets will be attached,” he said, adding, banks may even seek a change of management in case of gross mismanagement of a company that has gone for CDR.
Gross NPAs or bad loans in the banking system has touched 5%, causing concerns both for the Reserve Bank of India and the government.
According to a BCG-FICCI report, banks have cumulatively recast loan amounting to Rs. 2.5 trillion under the CDR exercise while most of it has been done in the last few months.
In 2012-13, banks restructured loans worth Rs. 75,000 crore under CDR, almost double of that in 2011-12.
Bankers feared that a chunk of this could turn unproductive. “With the economy slowing down, there are several genuine cases, where repayment has become an issue but the problem is that there are several others who are taking advantage of the situation and this needs to be addressed,” a bank chairman who did not wish to be identified said.
CDR is aimed at providing relief to companies that are unable to repay their loans by extending the payback period and reducing the interest rate. Besides, these companies are also given a repayment holiday and the option to convert a part of the loan into equity.
In the first quarter of 2013-14, banks restructured loans of 12 companies with a total amount of Rs. 20,000 crore, including construction major Gammon India Ltd’s Rs. 13,500 crore and logistics company Arshiya International Ltd’s Rs. 3,000 crore.