The strong visual reference of the Vivekananda Road flyover in Kolkata collapsing in a heap over unsuspecting motorists and pedestrians cannot be wished away in a hurry. More so for the lenders consortium who now own the company building it - IVRCl - under the Strategic Debt Restructuring scheme. The joint lenders forum in this case led by the ubiquitous SBI, PNB and Union Bank has an exposure of Rs 10,337 crore to the embattled construction company whose best days are way behind them.
The fall of the financial cliff first of the company and now the bridge has a touch of irony attached to it. For with the flyover collapse, virtually all avenues of finding a potential buyer for the company have turned to dust. Moreover, the actual and original promoter of the Hyderabad based company - Sudhir Reddy - now owns only a mere eight per cent in the company, while the bank consortium has majority control over the company. Hawking this stake to a new buyer is proving to be extremely difficult after the fusillade of bad press and overarching negativity surrounding the company in the wake of the disclosures emanating over the bridge fall. In a case of a bridge too far, the 21 strong lenders forum is reportedly wondering what is the way forward out of the cul de sac that they have boxed themselves in.
Of the Rs 10,337 crore exposure, Rs 2889 crore debt has been converted into equity when SDR was invoked. As much as Rs 7448 crore is still visible with red ink on the books of the banks. look at the timing of events. last November, SDR was invoked and in April this year, the bridge fell. As we have been explaining in this ongoing series under SDR, banks convert part of the debt into equity to take majority control of the distressed company and then under the RBI rules have a window of 18 months to find a buyer. In the eventuality that they don’t, they are stuck with the baby and a gushing bathwater awash with suds. Twenty two people died and 75 were injured in the bridge collapse which dates back five years from the time it was started.
IVRCl tried its best to delay the inevitable. last December, it decided to create two entities out of one - splitting the Build Operate Transfer and Engineering Procurement Construction parts of the business. The idea being to bring equity investors for the EPC entity, a business which has done relatively better for it. But this stratagem too failed. Banks converted Rs 2,889 crore of their debt to equity at Rs 8.7 per share, with a face value of Rs 2. Following the collapse of the bridge, the shares of IVRCl fell 9 per cent to close at Rs 5.77. As of Dec 2015, banks owned 36 per cent stake in IVCRl as they were forced to convert part of their debt to equity last year at Rs 24 per share after the company failed to pay dues on time. After conversion of debt to equity under SDR, banks equity is over 70 per cent in the company.
The flawed RBI SDR scheme is fraught with risk. Banks are grappling with rising NPAs and stressed assets. Years of cronyism and ever greening of distressed loans has turned balance sheets into wastelands. Should these beleaguered banks concentrate of fixing structual issues plaguing the public sector banking system or should they be running these companies and try finding new buyers for them. Caught in this vicious cycle, banks are at sixes and sevens, unable to clean their books and nor can they hawk these companies. In the process valuable management bandwidth is being utilised for this thankless task. like the 5/25 scheme which allows delinquent companies 25 years to repay loans by resetting the terms every five years when they pay a part of it, the SDR also prolongs the problem and turns it into a festering sore. Postponing the non performing assets actual provisioning is what SDR ends up doing. Religare Institutional Research catches the nub of the problem succinctly, “This scheme is in no way a cure-all for Indian banks’ deteriorating asset health — instead it exacerbates the risk by deferring an estimated (Rs 1.5 lakh crore ) of NPA formation from (2015-16/2016-17) to later yearsi.” Worse still, Religare in its January note added that it expects many SDR cases to fail, resulting in high and chunky slippages in 2016-17 and 2017-18.
The IVRCl tale of woe is symptomatic of the malaise that infrastructure and construction companies find themselves in. losses resulting from furious debt-fuelled expansion projects forced the company to approach the CDR Cell in January 2014. Its package was approved in June 2014 comprising of restructuring of term loans, working capital loans and fresh financial assistance by the banks. CDR failed to kickstart a revival process and banks invoked SDR in November 2015 with lenders owning 78 per cent equity in the company. With the collapse of the bridge, ended dreams of the bank consortium for what is described as ‘reputational risk’ in banking lingua franca entered the equation.
Religare’s stat sheet provides more numbers and they are very scary. The failure rate for the CDR restructured cases has increased to 36 per cent in September 2015 from 24 per cent in September 2013. As per the CDR Cell data, it received 530 cases till March 2015 from banks seeking to restructure debt totalling Rs 4.03 lakh crore without classifying these accounts as NPAs. The debt burden of these companies have been mounting since 2013 when they went for restructuring to the CDR Cell. And upon conclusion of the SDR, debt level of these companies are expected to rise by 70 per cent since the date of first restructuring.
Finally the 18 month so called window of opportunity allows two things to happen - waste of bank management bandwidth, debt balloons and failure to hawk the company to a potential buyer will ensure provisioning for the bad loans which will impact profitability. If in the December quarter 2015, IDBI Bank financials were roiled with a Rs 2183 crore net loss or ICICI in the March 31 quarter saw its net profit down by almost 76 per cent, then this same theory was in play. Going into the unknown blindfolded is dangerous anyway, imagine a bank doing that by trying to first run and then sell a steel or construction company, businesses it doesn’t have a clue about. The fear of the unknown stalks the banking system.
This act of God has left the bank with a Chinese pup. As of March 31, 2015, the debt to equity ratio of the company stood at 12.1. How can a company with that kind of financial parameters be expected to stay afloat. With borrowings at 12 times its capital invested in the business, it is no wonder that net losses have only been mounting every quarter - December 2015 Rs (-) 303.85 core, September 2015 Rs (-)305.46 crore, June 2015 Rs (-) 187.19 crore. The perils of easy money have caught up not with promoter Sudhir Reddy but with the banks stuck with the pup.