Gross non-performing assets (NPAs), or bad loans, of state owned banks surged 56.4 per cent to Rs 614,872 crore during the 12-month period ended December 2016, and appear set to rise further in the next two quarters with many units, especially in the small and medium sectors, struggling to repay after being hit by the government’s decision to withdraw currency notes of Rs 500 and Rs 1,000 denomination………The RBI discontinued fresh corporate debt restructuring (CDR) with effect from April 1, 2016. Here, promoters’ equity was financed by the borrowed amount, that added the burden of debt servicing on banks. The CDR cell faced problems on account of delay in the sale of unproductive assets due to various legalities that were involved.
And despite the discontinuation, some strands of CDR are retained to say the least. Whats wrong and what must have gone wrong or perceived as such for the Central Bank to have withdrawn support to CDR. A small take follows.
15 per cent is still talking about minimalist valuations. The most important part of the whole report lies in CDR failing, and that too when promoters’ equity is getting funded on borrowed money, resulting in an intensification of burdens on banks’-directed debt financing. This directly cross-purposes with Sebi regulations regarding companies/corporations pledging their shares and then discovering that when such valuations compared with market capitalization slump down, this is really a fix, as companies where promoters have pledged a large share of their holdings are viewed with caution in that if a promoter defaults on this debt, the lender transfers the shares into their own hands on one hand, and when they need funds they dump this stock on the market on the other, leading to sharp movements in share prices. These fluctuations really nosedive when economy is on the downturn, forcing promoters to borrow against their shares (not that they do not do that otherwise) and all the more prompting them to go out and borrow to meet volatility checks denting the balance sheet health.