At least half of the government's proposed Rs 2.11 lakh crore capital boosts for state-run banks will be used to write-off bad loans in highly leveraged companies that need restructuring to become viable.

The PSU banks have been facing a challenge due to the large amount of provisioning requirements arising out of the NPA issue. This recapitalization will give them adequate room for provisioning the NPAs as well as to look at credit growth. About 50-60% of these funds will be utilized towards improving the provision coverage ratio on NPAs for banks and balance will be left for credit expansion.

If you look at the provisioning cycles, it is in years three and four after terming an asset NPA that the biggest provisioning happens. Also, those companies that were into CDR (corporate debt restructuring) two years ago, or the ARQs (asset quality reviews) that happened in 2015 will come up for provisioning. Rules say a CDR that has been regular while in progress needs to be provisioned even for the last two years. New NCLT cases also may add to the provisioning requirements for banks as 50% has to be provided upon admission of an NPA asset in NCLT.

From their own balance sheet, banks could provide Rs 20,000-30,000 crore a quarter. Now, this amount will go up to Rs 80,000 crore. I think this is why they haven't said how the capitalization is being allocated. They would disburse where the provisioning needs are most acute.

The stress has been there for steel, power, cement, hotels and infrastructure. Also, the banks may see some stress in sectors like telecom where the competitive intensity is a drag on the profitability. Similarly, power generation assets have been reeling under the pressure of reduced tariffs and PPA availability etc. You have to realize, operationally these businesses are viable. They have just accumulated debt and now the problem is that the debt is too much. So, the cash flow is stifled by repayment cycles. That said, roads have recovered, steel sector is doing well now.

For an asset reconstruction company, an asset at average price of 40 to 50 cents to a dollar is viable. At that price, these assets still have value. We first sort financial matters by aggregating of debt across all the lenders, which is important as often there are 13-14 lenders and decision making is cumbersome. Then we work on a restructuring and operational turnaround plan. In fact, we restarted all the closed operating units at Ballarpur paper within two months of our acquisition. Often we find cases are stuck because of lack of working capital and significant repayment obligations arising from the ballooning debt repayment under existing restructurings.

In several cases, we have started with selling non-core assets and monetizing real estate. In many cases in power and real estate projects, the work is 90% complete but stuck because of lack of last mile funding. In one of our assets in Chennai, we consolidated all operations within one plant and are unlocking value of Rs 300-400 crore for the land from the other plant. For that to happen, we had to give loans of Rs 20-25 crore for a voluntary retirement scheme, but given the land value, it is worth it! In the case of Karaikal Port, effective turnaround has resulted in improving the EBITDA from Rs 80-90 crore to Rs 160-170 crore on the back of operational efficiencies. Now, they are looking at an LNG terminal and mechanization of the port. In Mumbai, we bought a mall, which at half a million square feet, was unviable. This was resolved by converting the mall into an office complex and selling as commercial space. Similarly, a Bangalore-based hotel needed additional Rs 50 crore for completion of final fittings and installations. Basically, the effort is to infuse capital where required and restructure to convert it into a cash flow generating asset.

These assets are to be assessed for resolution viability, case by case. Operating assets with EBITDA earning potential are the cases being targeted. Assets were identified a while ago and they are the same 80-90 NPAs (non performing assets) that have been earmarked. Banks know them, we know them. Out of these, we acquired 13-14. At a certain price, all are viable or can be restructured.

In the ARC set up, banks keep 85% economic interest; so eventually when the returns begin to rise, they are not cut out of it and participate in the upside. You know it is difficult for individual lenders to have effective control on the assets and it's better to have a third-party to unify them. Eventually, if you bought at Rs 50 crore and recover Rs 80 crore, banks will also get the upside.

Talent is very important for resolution of such NPA cases. In fact, there are only two factors, i.e. talent and capital that make the difference in this segment. We started the business in 2008-9 and we got people at the time from ICICI Bank, IDBI Bank, and MNC institutions. So, with collective experience, we have the exact knowledge of the assets and a team with capital markets restructuring skill sets, and investment banking capability. We have capital of our own and recently through our partnership with Canadian Pension Fund CDPQ. We also have a strong advisory board comprising industry stalwarts like Mr S K Roongta (ex-chairman of SAIL). For functional expertise, we outsource it to sector-wise consultants.

Since PSU banks weren't lending, the total system credit had come down from 17-18% growth in the last 20 years to 11-12% in the last three years. So, we are hoping this will expand the market a little bit back to earlier levels. There will be categories where the PSU banks will continue to compete aggressively - car loans, home loans, micro finance, gold etc. In SME and structured finance, they may not be able to compete, because these are smaller markets. NIMs (net interest margins) of housing finance companies and private banks should come down by 10-20 basis points, which is ok. Organizations will become efficient and absorb it.