Business Restructuring Services
In the last few years as the Indian Economy registered a slowdown, banks have accumulated high levels of stressed loans due to inadequate credit assessment and monitoring. There is a significant rise in the number of stressed loans emanating from industries like infrastructure, power sector, iron and steel, textiles, aviation and mining, which contribute to over half of the total stressed loans.
The current approach to manage loans under stress is to apply short term measures and keep the loan current instead of trying to formulate an end to end solution on revival or recovery. It may require management changes, further equity infusion, long term debt restructuring or a hassle-free liquidation and recovery process in place, mandatorily involving promoters’ intention and lenders’ pro-active support to revive the business.
While in the CDR mechanism, the objective was to provide temporary relief to the borrower rather than making active efforts to revive businesses, they have met with limited success in reviving stressed assets due to inadequate evaluation of business viability and effective monitoring.
Alternatively, although banks tried to offload stressed loans to Asset Reconstruction Companies (ARCs) via the security receipts route, this option has yet to be exercised fully by the banks due to the expectation gap in the pricing and returns on Security Receipts (SRs). While ARCs use much higher discount rates resulting at times in unrealistic valuation, there is no incentive for ARCs to participate in auctions as the reserve price tends to be high. As a result, banks are forced to continue holding these positions until most of their value has deteriorated, resulting in larger losses. With foreign investment in ARCs up to 100% being permitted now, we foresee ARCs participating in the long-term revival of borrowers with a good turnaround potential from merely liquidating assets to recover their dues. This would only be possible if they can estimate sustainable debts, arrange timely capital infusion and carve out core operational businesses from the non-core assets and enable revival.
With the introduction of the insolvency and the bankruptcy code 2016, the government has paved way to a rational and a quicker method of settling this NPA issue. Though this would be operational in the coming months after clearing implementation challenges, at least, a roadmap seems to have been set in place on how a transparent mechanism would work towards settling the NPAs.
At BDO India, our team helps companies under stress and lenders looking to revive or exit out of Non-performing assets. Our value proposition is in our technical strength in understanding the customer requirements precisely and delivering to their needs and satisfaction. Our focused teams include a team of highly qualified finance and accounting professionals, forensic experts and industry professionals. BDO India has a wide range of clients across BFSI, Pharma, IT, Ecommerce and Manufacturing sectors from where we draw our experience and learning globally.