Banks have been cautious in big-ticket lendings, taking into consideration various parameters.
Now they need to be overcautious about the adverse court rulings as just two verdicts of Future Group and Vodafone Idea delivered last week have put over Rs 50,000 crore loans in jeopardy.
Last week, the Supreme Court effectively blocked Future Group’s $3.4 billion sale of retail assets to Reliance Industries, jeopardising nearly Rs 20,000 crore the retail conglomerate owes to Indian banks.
Loans to Future worth nearly 200 billion rupees were restructured earlier this year, giving it more time to come up with repayments due over the next two years, but that was on the premise that Reliance would bail it out,
That Future ruling was delivered days after the Supreme Court rejected a petition to allow telecom companies to approach the Department of Telecommunications to renegotiate outstanding dues in a long-runinng dispute with Indian telecom players.
That raises concerns over whether Vodafone Idea will repay some Rs 30,000 crore it owes to Indian banks and billions of dollars more in long-term dues to the government.
At the end of March, Indian banks had total non-performing assets of Rs 8.34 lakh crore, the government has said.
Vodafone Idea
If the telecom firm fails to repay its adjusted gross revenue dues to the government and its guarantees are invoked, it would immediately turn into debt and would soon be classified as a non-performing asset. The Supreme Court last week rejected telecom firms’ plea for reconsidering calculation of adujsted gross revenues.
The hit on PSU banks will not be as large as their exposure because in recent years lenders have been demanding a substantially higher cash margin for their guarantees. IDBI Bank is understood to have up to 40% margins for the guarantees it has extended. But even then it will be large enough to wipe out profits for many.
What ahead?
The insolvency process can work only when there are buyers. In the case of Vodafone, the Rs 53,000-crore AGR (adjusted gross revenue) dues to the Centre are a deterrent. This is despite Birla being willing to write down his entire equity. The government dues cannot be avoided as the Centre cannot make an exception for one company. Even in insolvency cases, the department of telecom has claimed its dues to be that of a financial creditor although there have been attempts to mark them as operational creditors.
The uncertainty over DoT’s claims, which is already being experienced by lenders in the Reliance Communications insolvency case, would make telecom resolutions a challenge. Lenders do not want to risk insolvency as this would result in the exit of customers which was the case with RCom.
With the company’s debt obligations being equal to 1.5% of the banking sector’s credit, experts have suggested the debt be converted into equity shares, the company be nationalised and perhaps merged with BSNL and MTNL. However, it seems highly unlikely the government will nationalise the company. On balance, they would reckon it is better to give up the revenues than act politically incorrectly in bailing out a private sector player—one with a foreign promoter.
The Future is bleak
Local and overseas banks — 28 of them led by Bank of India — were counting on Reliance Retail’s takeover of the Future Group for recovery of their dues.
In April, the KV Kamath Committee set up by the Reserve Bank of India (RBI) approved a proposal by the lenders to restructure loans to Future Retail and
Future Enterprises, the main units of the Kishore Biyani-led group. Bank of India is the lead lender among the 28 local and overseas financiers that floated the loan recast plan.
According to that deal, Future Group had promised to pay banks Rs 6,900 crore in two tranches by the end of FY22, mainly by selling its small format stores.
This would allow lenders to convert the short-term loans, non-convertible debentures and overdue working capital loans into term loans, which were to be repaid in two years. The group has not yet identified any buyers for these stores.
Bankers had agreed on the deal as a temporary arrangement on expectations that the Reliance takeover will be completed soon, meaning the lenders would no longer depend upon Future to make the payments.
With this latest court order, all such plans will have to be reconsidered.
The group has very little immovable property that can be sold. All its assets are in the form of inventory and receivables that are very difficult to recover. The Reliance-led plan is the best option right now because the recovery will be very low in the bankruptcy courts.
Future Retail is the largest debtor in the group, with about Rs 10,000 crore of dues. Two other listed companies — Future Enterprises that holds its supply
chain, and Future Lifestyle Fashions that houses apparel brands such as Central and Brand Factory — add another Rs 11,000 crore to the debt pile.
Lenders had agreed to an interest moratorium between March 1, 2020 and September 30, 2021. They had also agreed upon waiving all penal interest and charges, default premiums and processing fees unpaid since March 2020 to the date of the implementation of the Reliance Retail takeover.
There is some respite in the central bank’s extension of the timeframe for meeting the financial parameters for companies undergoing restructuring.