<article>Indian lenders are struggling to find new owners for unprofitable steel and infrastructure companies they took over under a debt-for-equity swap, a warning sign for China, which is launching a similar scheme.</article>

Indian lenders are struggling to find new owners for unprofitable steel and infrastructure companies they took over under a debt-for-equity swap, a warning sign for China, which is launching a similar scheme.
Indian banks have either taken over or are in the process of seizing majority control in 18 firms with a combined debt of about $15 billion, under a central bank plan that allows them to swap the companies&#8217; debt for equity and freeze non-performing loans, brokerage Religare Capital Markets estimates.
The Reserve Bank of India&#8216;s Strategic Debt Restructuring (SDR) swap plan &#8211; aimed at reducing a $121 billion corporate bad debt mountain &#8211; envisages banks passing on control to a new owner within an 18-month grace period.
Buyers, however, are not flocking in.
Lenders to Electrosteel Steels, the first test case in the scheme, were dealt with a blow earlier in April as the only investor interested in a stake in the company, London-headquartered securities broker First International Group Plc, withdrew its interest, the broker said.
That followed a collapse of talks with prospective buyer Tata Steel, which had wanted a sharp discount. A new suitor, the Dalmia business family, has shown interest, according to bankers, but there is no offer yet.
In the meantime, the banks have classified Electrosteel&#8217;s around $1.7 billion debt as non-performing, an admission the plan is not working. Both Electrosteel and Tata Steel declined comment.
Chinese lenders are facing rising pressures from slowing economic growth, with non-performing loans reaching a 10-year high of 1.27 trillion yuan ($196 billion) at the end of 2015.
&#8220;The difficulty faced by Indian banks in finding new owners highlights the challenges that Chinese banks might also face,&#8221; said Chua Han Teng, Asia analyst at Fitch affiliate BMI Research.
&#8220;Chinese banks will likely seek to proceed cautiously with the proposed debt-equity swap plan, and will be extremely selective given that it is not the expertise of banks to manage these highly-indebted companies.&#8221;
China is studying plans for potential regulations that would allow commercial lenders to swap non-performing loans of companies for stakes in those firms.
The International Monetary Fund said last week that China&#8217;s massive corporate debt problem could be eased through debt-to-equity conversions only if these apply to viable firms that undergo restructuring.
GOING SLOW
Indian banks are going slow on debt-equity swap deals after a raft of such transactions in the second half of 2015.
While the lack of buyers is discouraging banks, lenders have also been tied up in a separate clean-up exercise ordered by the RBI which wants full loan disclosure by March 2017.
&#8220;I don&#8217;t think (this) is a scheme in its current composition, its current framework, that has enough value for a bank to get into,&#8221; said Rana Kapoor, CEO at Yes Bank, India&#8216;s fifth-biggest private sector lender.
RBI Governor Raghuram Rajan has acknowledged that the SDR scheme had yet to be successful.
&#8220;We are seeing more buyers come in to the system but a full-fledged operation of (the debt-to-equity swap scheme), I think we are yet to see.&#8221;
Prospective buyers are discouraged by the prolonged downturn in the steel sector, which has been hit by dumping from China, a senior banker with a state-run Indian lender told Reuters.
Investor interest has also been low in infrastructure, despite a government plan to spend $1 trillion to revive the sector, as many large projects that were stalled during a three-year long economic downturn have yet to be revived.
&#8220;The slowdown which started in 2012-13 is still continuing even today,&#8221; said N. Sridhar, director of finance at closely-held Coastal Projects, where creditor banks have taken equity by swapping their debt but have yet to find a new owner.
&#8220;Our company is in a niche sector of underground tunnelling&#8230;Companies who do not have that kind of experience are looking at us as an add-on to them,&#8221; Sridhar said.
Reuters

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India's floundering bank debt-for-equity deals a warning for China

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