India Inc to shore up its finances

India Inc is conducting a fire sale of assets as banks struggle under more than US$190 billion in debt amassed through years of corruption, project delays and economic slowdown.

Indian authorities are trying to clean up tens of billions of dollars of bad loans that are weighing on the country’s banks and affecting the wider economy.

Corporate India is increasingly resorting to selling assets spanning oil blocks, malls, hotels and coal mines to clear these debts as the Reserve Bank of India (RBI) closes in on lenders.

GMR Group, an infrastructure company based in Bangalore, a few weeks ago revealed it was selling its 51 per cent stake in a road project in Karnataka state to help pay off its debts. The New Delhi-based Jindal Steel and Power is seeking to sell a power plant to trim its debt after eight straight quarters of losses, Bloomberg reported.

Essar Group, another debt-laden company controlled by the billionaire Ruia brothers, agreed last year to sell a 98 per cent interest in its Essar Oil unit to a group led by Russia’s Rosneft.

New Delhi this month gave the RBI, under central bank governor Urjit Patel, greater power to deal with the problem of bad loans that banks are grappling with. The finance ministry has estimated that stressed debt in the Indian banking system could amount to more than $190bn.

“The important issue will be to find buyers for these assets,” says V K Vijayakumar, the chief investment strategist at Geojit Financial Services. “There will be buyers for the profitable assets. But finding buyers for the loss-making assets would be challenging in the present difficult business environment.”

The new powers mean that the RBI now has the ability to direct banks to take action against non-performing loans. Amongst other provisions, the central bank is authorised to order lenders to start bankruptcy proceedings if a company defaults. It can also appoint an authority or panel to advise banks on bad debt.

The objective of this act is that the “status quo can’t continue,” Arun Jaitley, India’s finance minister, said last month after the new steps were announced.

He also said that further measures are in the pipeline to tackle the widespread problem of stressed assets in the country and that these measures would be unveiled in due course.

Nitin Balwani, the dean at IFIM Business School in Bangalore, says that authorities in India have been forced to act on realising it was “no longer feasible to sweep the elephant under the carpet”.

“With the RBI and government pressure, the big groups have been trying to limit their exposure to these bad assets and have been selling their operational assets to fund their part of the funding requirements to bring the business back on track.”

He says Indian companies “including Essar and Jindal, to name a few, have been working on restructuring their businesses and selling off a few assets to fund their portion of the commitment. Banks have been pushing these corporate houses and with more teeth to RBI, this is expected to gather pace”.

The Hindu newspaper reported that Reliance Group, led by billionaire Anil Ambani, is selling off thousands of telecommunications towers, while Jaypee Group is selling off cement and power plants, and GMR Group is also offloading some infrastructure assets.

Babu Sivaprakasam, a partner at Economic Laws Practice in Mumbai, says that “the much-awaited action on defaulters by the government and RBI will likely throw the middle and light weights in a tizzy”, but action is necessary given the extent of the problem.

“Distinguishing and treating differently commercial decisions taken in good faith and wilful default and fraudulent practices will bring in much-needed assurance for the banks to be decisive and assist credit off-take as well,” he says. “The oversight committees are anticipated to prod the banks by providing the confidence to move forward.”

Looking at the broader picture in the country, Mr Vijayakumar explains why India’s banks are grappling with such a large burden of bad debt.

“Profligate lending by the banks during the boom years of 2003 to 2007, reckless borrowing by some corporates in segments like steel, power, mining and construction [and] the crash in steel prices following the huge excess capacity in China [have] contributed to the rising non-performing assets burden,” he says.

Other experts add that corruption, a slowdown in global and domestic growth, wilful defaults and delays in approvals for projects have also contributed to the issue.

The steps now being taken by the RBI are broadly positive, Mr Vijayakumar believes.

“Generally, there is a sense of relief since (the) resolution of the problem will contribute substantially to economic growth. This will benefit everyone including the corporate sector.”

Authorities have increasingly been prioritising trying to resolve the issue of stressed assets, which makes it difficult for banks to issue credit and hampers economic growth. Addressing this problem is critical as India aims to boost its economy and create enough jobs for its large, young population.

Public sector banks are the worst affected when it comes to bad debt.

The RBI last year started taking serious action to resolve the problem under Raghuram Rajan, the former governor.

When he was in office, the central bank ordered lenders to clean up their balance sheets and forced them to go through an asset-quality review to disclose their stressed assets.

“Even he could not estimate the problem at hand, as the banks were unwilling to identify and share the right data,” says Mr Balwani. “The bankruptcy and insolvency act, promulgated last year and touted as the panacea to address the NPA [non-performing asset] issue, has not picked up as the cases end up tangled in the legal mess.”

This has forced the government to make greater efforts to manage the problem, he adds.

Meanwhile, the RBI last week put state-owned IDBI Bank under watch as its non-performing assets almost trebled to more than 350bn rupees (Dh20bn) in the two years to December 2016.

IDBI Bank said in a bourse statement that “this action will not have any material impact on the performance of the bank and will contribute to improving the internal controls of the bank and improvement in activities”.

It is anticipated that more public sector banks will be put on the RBI’s watch list, as they report losses and efforts continue to clean up the balance sheets, which in turn will only increase the pressure on India Inc to sell off assets.

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