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Banks may be allowed to raise equity holdings in troubled projects, says Raghuram Rajan

Banks may be allowed to raise equity holdings in troubled projects, says Raghuram Rajan

RBI is planning to unveil two measures to enable more productive loan restructuring, he said, adding that it is also mulling extending the 5/25 rule for fresh lending.

RBI Governor Raghuram Rajan (Photo: Reuters) RBI Governor Raghuram Rajan (Photo: Reuters)

Reserve Bank Governor Raghuram Rajan on Tuesday said banks may be soon allowed to increase their equity holdings above the current cap of 10 per cent in companies undergoing debt restructuring.

The central bank is planning to unveil two measures to enable more productive loan restructuring, he said, adding that it is also mulling extending the 5/25 rule for fresh lending.

This rule enables a bank to extend loans to an infra developer for 25 years with an option to rewrite or reset the terms of the loan or transfer it to another bank or financial institution after five years.

It ensures that tenure of the loan matches the life cycle of the underlying asset. In the next few days, I hope to announce two key relaxations.

One is a move towards 5/25 restructuring for existing projects which are standard and also to allow banks to take equity in restructuring to a greater extent than they currently can, Rajan said, addressing the media after announcing the bi-monthly policy wherein he left all the key policy rates unchanged.

There is a substantial financial stress in some sectors. We have been taking a holistic view instead of a sector by sector approach keeping in mind the need for a financial restructuring while limiting the extent of forbearance, he said.

Finance Minister Arun Jaitley had in the Budget proposed that he would ease the financing structure for infrastructure projects by introducing the 5/25 rule which allows to let bank to lend money to a developer for up to 25 years.

Bad loans and restructured loans together constitute more than 10.4 per cent of the banking system assets as of the September quarter, with some state-run banks like Central Bank having such dud assets over 20 per cent, while nearly half of them have it between 15 per cent and 19 per cent.

Last fiscal as much as 20 per cent of all infra loans were restructured. As that as of March 2014, infrastructure loans worth around over Rs 57,200 crore were under corporate debt restructuring.

Rajan explained that as part of a restructuring process, banks' holding in a company had been capped at 10 per cent through a notification issued in May 2013.

Meanwhile during the con-call with the analysts, RBI Deputy Governor S S Mundra, said: In the whole restructuring process, if enterprise is viable and banks are putting a package and if they are taking a higher write-off or haircut in shape of debt, I think there is merit that they can in point of time converted into equity.

It also has another advantage, that in such cases if there is a turnaround, then the upside is going to promoters alone but when the proportion is high, some of the upside can spillover to the bank.