BFSI - 5:25 Structure: Tip of The Iceberg; Sector Update ::Edelweiss, link

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One of the pressing needs to kick-start the Indian economy is to lend fillip to the infra and core industries. The problem engulfs into three broader aspects: 1) fuel supply constraints; 2) regulatory approvals; and 3) financing constraints. With the government’s resolve to address the first two issues, the RBI is also doing its bit to address financial constraints. In this backdrop, the RBI today approved the flexible restructuring option for banks via the 5:25 structure (for existing projects which have achieved DCCO as well). We believe this has the potential to solve a large part of the problem and benefit the entire gamut of stakeholders from the developers, banks to end consumers. For banks, the benefits will be multipronged as it will not only lower fresh stress asset creation (particularly in sectors which were stressed), but also put to rest apprehensions of higher slippages from restructured book. This will benefit public sector banks with higher infra/steel exposure, higher restructured book (Canara Bank, OBC, PNB) and corporate focused private banks (ICICI Bank, Axis Bank) resulting in valuations re-rating.

The moot question: How does it move the needle?

To understand this it is vital to bifurcate projects into lifecycles and underlying problems. Our interaction with various banks/experts/developers suggests 3 basic stages: problems as - 1) under implementation: No refinancing solution (along with other issues) - a hindrance to achieve DCCO; 2) implemented projects: take-out financing option available, albeit regulatory constraints mar potential; and 3) new project: Limited takers. To address these, the RBI has allowed: 1) flexible lending option (5:25 scheme) for existing projects replacing take-out financing option (doing away with 25% new lenders clause among others), which will address potential concerns in the entire value chain from financing perspective. Further, we believe issues for under implementation need to be addressed which will happen in due course of time. On the other hand, higher accrual from completed projects can be utilised to kick-start a new investment cycle or fund equity capital for under implementation projects.

LINK
https://www.edelweiss.in/research/BFSI--525-Structure-Tip-of-The-Iceberg;-Sector-Update/27839.html