India banks can now convert debt into equity

Major boost for stressed loans recovery efforts.

In India, banks have been provided significant tool for recovery of stressed loans by the Reserve Bank of India.

According to a research note from Maybank Kim Eng, under the new rules, banks can convert their debt into equity in case of failure of restructuring plan.

Banks under joint lenders forum can become majority owner in the defaulting company by holding 51% or more stake.

Here's more from Maybank Kim Eng:

Banks are expected to divest the equity in the company by finding a new promoter as soon as possible, if they fail to do so within 18 months the classification for loans would change as per prudential norms.

In the interim period banks are advised to appoint a professional management to run the company. Banks would not be required to make NPL provision or MTM provision in the interim period.

The above regulation would provide flexibility to banks for recovery of stressed loans. Restructuring on account to mismanagement by the promoters would reduce significantly.

With conversion change in promoter a resolution would be possible. We see this move as a major boost for banks. Remain overweight, prefer SBIN and BOB within PSBs.