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Banks eye ₹70K cr reduction in debt from top three deals
The recent flurry among corporate houses to sell off assets to reduce their debt has given banks, which are reeling under a huge pile of bad loans, reason to smile.
The recent flurry among corporate houses to sell off assets to reduce their debt has given banks, which are reeling under a huge pile of bad loans, reason to smile.
Asset sales by three companies alone this year are likely to help banks reduce their debt by around ₹70,000 crore.
On October 15, Essar Oil sealed a deal with Russia’s Rosneft, United Capital Partners and Trafigura Group to sell 98% of equity in an all-cash deal worth $12.9 billion (around ₹85,000 crore). The Ruias-led group said the deal will help reduce its total debt of ₹88,000 crore by half.
In July, the debt-ridden Jaypee group sold a cement firm to Aditya Birla group’s UltraTech for over ₹16,000 crore. Anil Ambani-owned Reliance Communications sold 51% in its tower unit to Canada-based Brookfield Infrastructure for an upfront cash payment of ₹11,000 crore. The proceeds will be used to cut debt, the firms had indicated while announcing the deals.
However, it may be too early to open the bubbly, banking experts warned. The bad loans tally for banks is likely to come down and lenders may well meet the RBI deadline of March 31, 2017, but an actual reduction in the NPA count may start only next year, they added.
RBI data till June had showed that gross bad loans as a percentage of total loans had doubled to 8.7% from 7.6% in March.
According to brokerages, the debt reduction would help banks. A report by Motilal Oswal on Monday said: “The Essar Oil deal could result in the largest case of NPA resolution for the system. Essar Group’s total debt to the system is ₹1.1-1.3 lakh crore, of which EOL (always a standard account) accounted for around ₹28,000 crore. Most banks have declared their exposure to Essar Steel as non-performing (NPA), and if the promoters infuse capital, banks would be willing to take some haircut under the S4A scheme. This would be the largest case of NPA resolution for the system (10% of system NPL).”
S4A is a debt restructuring scheme initiated by the RBI where the total debt is spliced into so called sustainable and unsustainable parts based on the company’s ability to generate revenue to meet interest payments.
Sunil Shrivastava, deputy managing director (corporate accounts) of State Bank of India, welcomed the trend. “This is a precursor to encourage more players from outside India to come and invest here. We are working across all possibilities with all corporates and will have majority of the resolution done. Some of it would spill over for next year and would be resolved by asset reconstruction companies or the SARFESI Act. But this will encourage more promoters to dilute stakes.”
Recently, global ratings agency Moody’s gave a thumbs-up to the outlook for Indian banks, saying asset quality concerns may have bottomed out. The Essar Oil stake deal also prompted ICICI Bank MD Chanda Kochhar to say that the move will be positive for a reduction in banks’ bad loans. On Monday, when the Sensex fell 0.5%, shares of ICICI Bank rose 6.9%
However, all are not cheering the trend. RK Bansal, chief financial officer at IDBI Bank said: “The exposure to one group will go down, but these are only on standard accounts. It is positive that there will be some money coming into the projects... “However, we wouldn’t see reduction in NPAs as all of the loans are standard in banks’ books. Of course, promoters will put in some money, but we will not see a major impact on NPAs.”
Earlier in the year, Jaiprakash Associates sold 74% stake in Bhilai Jaypee Cement to Orient Cement to cut debt. Among other deals, Reliance Infra sold its cement unit to Birla Corp for ₹4,800 crore and Jindal Steel and Power sold its power plant to JSW Energy for ₹6,500 crore.
