Deadline on Soured Indian Loans Offers Opening to Private EquityBy
RBI had asked lenders to clean up balance sheets by March 31
Banks set to miss the deadline and raise bad loan provisions
An impending round of bad-loan provisioning by Indian banks provides an opportunity for private equity and special-situation funds to pick up soured assets at lower prices.
Brought on by the expiry of a central-bank deadline for lenders to clean up their balance sheets, the expected provisions will force them to recognize lower valuations on bad debt, making them easier to dispose, according to S. Sriniwasan, chief executive officer of the Kotak Special Situations Credit Fund. Meanwhile, banks will probably get more impetus to convert stressed loans into equity in the delinquent borrowers and sell them, said consulting firm EY’s Dinkar Venkatasubramanian.
Sales of the assets will gather pace “only when the loans get provided for and appear on the banks’ books at a lower value, thereby narrowing the gap between the bidding price and the book value,” said Sriniwasan, whose fund is backed by the Canada Pension Plan Investment Board. “That day is not far off.”
The opportunities stem from lenders having to set aside new provisions after the expiry of the Reserve Bank of India’s March 31 deadline to get rid of bad loans now worth about $180 billion. That prospect has been increasingly apparent for months as low capital buffers and ineffective tools for loan recovery made it impossible to meet the target. Credit Suisse Group AG estimates banks will have to put aside at least 860 billion rupees ($13 billion) in the next 12 months to comply with higher RBI requirements for older soured loans.
Having to make bigger provisions will encourage lenders to put more pressure on borrowers, forcing them to sell assets to funds directly to make repayments, said EY’s Venkatasubramanian, a partner in the firm’s transaction advisory services division in New Delhi.
In recent years, Indian lenders have resorted to a variety of ways to remove their bad loans, some involving private equity players -- State Bank of India and ICICI Bank Ltd. formed joint ventures with PE firms to invest in stressed assets, providing additional funding to revive more viable companies.
There is appetite for the country’s distressed assets with firms including TPG, KKR & Co. and Brookfield Asset Management Inc. have expressed interest as they seek cheap avenues to capitalize on the country’s economic growth.
Brookfield said in November that it’s weighing more Indian investment targets after agreeing the previous month to buy Reliance Communications Ltd.’s mobile-phone tower business in what was the country’s largest deal by a private equity fund. The highly leveraged telecom company sold the tower unit to reduce its debt by about a quarter.
More targets may emerge from the RBI’s strategic debt restructuring program, a mechanism launched in June 2015 that enables banks to convert bad loans into equity in the borrowers.
Lenders have either converted, or are seeking to convert, more than 1.5 trillion rupees of loans into controlling stakes in at least 36 companies, data compiled by Bloomberg show. Once they convert the debt into equity, the lenders are required to sell at least part of their stakes within 18 months, after which they have to make provisions for the loans depending on the value of their shareholdings.
Banks have taken control of at least four companies including Monnet Ispat & Energy Ltd., a New Delhi-based steel and power producer, and IVRCL Ltd., a Hyderabad-based construction company, though none of the companies have been sold so far, filings show.
“Now that banks have already converted loans to some of these companies into equity, it makes sense to find a buyer sooner rather than later,” Venkatasubramanian said. “Lenders will have to take deep haircuts on their exposure to push these sales through.”