Rajan: Seeking clean-up of banks’ balance sheets by 2017 to help revive credit growth.

Bloomberg
Mumbai

Reserve Bank of India (RBI) Governor Raghuram Rajan’s war on bad loans is set to spur a slew of mergers and acquisitions after he allowed lenders to take control of defaulting companies and sell those assets to recover dues.
The volume of deals in India will jump from a five-year high as banks, racing to meet a 2017 deadline to tidy up books, seek to dispose of their holdings in distressed companies, M&A advisers say.
Lenders have already started converting debt owed by 10 firms into equity since Rajan introduced the strategic debt recovery mechanism in June and they have 18 months to find suitors and sign sale deeds.
“We are seeing interest from both domestic and international firms in picking up some of these assets,” Ajay Saraf, executive director at ICICI Securities, the No 2 M&A adviser for India last year, said in a telephone interview on December 14. “Banks attempting to recover stressed loans will add significant numbers to mergers and acquisitions.”
Indian companies from steelmakers to infrastructure builders that borrowed heavily to expand capacity in the years after the 2008 financial crisis are saddled with debt they can’t service after the global slowdown.
As the nation’s banks struggle to pare stressed assets from a 13-year high, Rajan has ordered them to clean up their balance sheets by 2017 to help revive credit growth and spur the $2tn economy.
Lending rose 9.8% in the 12 months through November 27, RBI data show, close to February’s 8.88%, which was the slowest pace since 1994.
Gammon India, Monnet Ispat & Energy and IVRCL are among the ten companies for which creditors have invoked the SDR mechanism, exchange filings show.
The firms have a combined Rs641bn ($9bn) of loans outstanding, according to Religare Securities. By the end of the fiscal year through March, the total debt of all companies coming under SDR may rise by $50bn more, according to estimates by Dinkar Venkatasubramanian, a partner based in Gurgaon near New Delhi at Ernst & Young’s transaction advisory services.
He is part of a team that is helping lenders recover loans from at least six delinquent firms.
India had Rs2.7tn of loans in the restructured category and more than Rs3tn of non-performing loans, latest central bank data show.
The SDR process allows lenders to maintain classification of stressed assets as “standard,” helping slow the pace of bad- loan formation, according to Moody’s Investors Service. Banks can also bring managers of their choice to make the companies profitable under SDR. However, if they fail to sell these companies within the deadline, provisions on these loans could triple, hurting their profitability, Vibha Batra, group head for financial sector ratings in New Delhi at Moody’s local unit ICRA.
“This can be a game-changer if executed well,” said Hyderabad-based Jagannadham Thunuguntla, head of fundamental research at Karvy Stock Broking.
“Can they turn around their businesses and can they successfully divest their ownership stake to any interested buyer? That single point can determine the success or failure of this plan.”
Indian companies sealed M&A deals worth $62.3bn in 2015, the highest since 2010, according to data compiled by Bloomberg. Many of them involved highly leveraged companies seeking to cut debt.
The major ones were Suzlon Energy selling its German unit to funds managed by Centerbridge Partners for €1bn in cash and Tata Teleservices selling its stake in tower company Viom Networks.
The volume could’ve been higher had it not been for demands by controlling shareholders for better valuation despite the distress they were in, said Ernst & Young’s Dinkar.
As for initial public offerings, local companies raised Rs922bn from equity markets this year, again the most since 2010, according to data compiled by Bloomberg.
“There is a market for these assets,” he said. “It may not be very attractive now, but then you have to make it salable in 18 months. And, we are trying to do that.”