Evaluating the success of debt restructuring options

The International Monetary Fund recently stated that Indian corporate entities are among the highest leveraged entities in the Asia Pacific region. Recent data show that non-performing assets (NPAs) have risen alarmingly from 2.2% to 3.8% of the total loan portfolio of Indian lenders, and greater difficulties are predicted in the medium term, owing to factors such as rising interest rates, margin retention, foreign exchange costs and a perceived policy “stasis”, all of which have slowed growth and made repayment more expensive.

Many Indian companies are grappling to find options to manage their potentially troubling debt obligations. The limited success of such options raises questions on their effectiveness.

Some of the options being considered by borrowers and lenders involve refinancing the debt with offshore debt and/or equity infusion, which have been hard to come by, partly due to regulatory challenges. The external commercial borrowing route has narrow applicability for refinancing of rupee loans and has not found significant patronage. Further, refinancing is only advantageous if better terms are available, and in the rupee context, lower interest rates have been difficult to procure within the Indian market.

Given that refinancing options are proving to be both elusive and challenging illiquid borrowers that are considering restructuring of their loans are likely to suffer exacerbating stress.

Jeet Sen Gupta is a partner, Deep Roy is an associate partner and Divya Srikanth is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.