Banks are reeling under severe stress due to rising NPAs. Even Supreme Court has intervened by asking for the list of defaulters with outstanding above Rs. 500 crores. There is a debate about making public the list.
Instead of arguing over the same, let us examine the reasons. This will help in taking decisions in future.
Most of these advances are related to infrastructure or long gestation projects. Funding pattern in these cases have been 75% debt and 25% equity and in some cases, even 80% debt and 20% equity. The debt funding in most of the cases is proportionate to the amount brought by equity. For Example, in a project of Rs. 4000 crores, the equity is Rs. 1000 crores and Debt Rs. 3000 crores. If the promoter brings equity by Rs. 100 crores, the lenders disburse debt by Rs. 300 crores. Again, the promoters bring equity by another Rs. 100 crores and lenders disburse Rs. 300 crores. It goes on. But, promoters fail to bring equity after Rs. 500 crores. What happens then? The project gets stuck up and lenders are left in dilemma, as they have already sunk in Rs. 1500 crores as per matching contribution principle.
Time has come for high level of discussion on the subject.
The author calls for solutions from the readers, though he will share his thoughts in subsequent posts.
It is high Banks negotiate with Public sector entities for equity infusion in these projects with present promoters removed from executive powers and perks enjoyed by them. Once, the project get going, the public sector entities together offload their equity in open market through public issue, so that the existing promoters are unable to acquire them back at cheap negotiable rates.
ReplyDeleteAt last, Finance Ministry has open upto involvement of PSUs in taking over stressed assets. PSUs like NTPC, BHEL, SAIL have subsidiaries. These entities must learn to unlock the value in subsidiaries by listing them.
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