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Business EconomyPosted at: Jul 1 2016 1:34PM


Banks may have to take 40-70 percent hair cuts in 240 firms: ASSOCHAM-Ind-Ra Study

Mumbai, Jul 1 (UNI) Lenders would need to take hair cuts or cut
their losses between 40 and 70 per cent in at least 240 companies
which are under heavy debt mostly in steel, construction, power,
textiles and infrastructure, ASSOCHAM-India Ratings and Research
(Ind-Ra) joint study said.
Study suggests asset reconstruction with the help of a revamped
Asset Reconstruction (ARCs) sector for achieving a sustainable level
of bank debts, going down the non-performing assets (NPAs).
Since in the current cycle most of the stress is driven by
stretched balance sheet, viability assessment needs to be looked at
on a going concern basis. However, a mix of measures such as
recognition of sustainable debt, ability to bring third-party
investors in Security Receipts (SR) could set the ball rolling for
the revival of distressed companies.
It suggested encouraging third-party capital to replace banks’
investment in SRs. The current model of banks investing in SRs
backed by their own distressed debt has its own limitations. The
current model could still be useful for cases of liquidation where
further capital commitment is not called for. The benefit of the
prevailing model was that it allowed banks to capture the contingent
upside and also in some cases harmonise the required provisioning by
investing in SRs.
However, this model has had a number of issues such as
misalignment of interest between banks and ARCs, the existence of an
unsustainable level of debt delaying the restructuring of companies
and banks having to subsist with the problem in their investment
books.
''This problem can be solved if banks are allowed to transact
at realistic haircuts with the benefit to amortise the loss on sale
as long as third-party investors are ready to fully step into their
positions ''
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