Ritu Jindal, NDTV, 24 Mar 2012 | 07:55 AM
Indian industry seems to be facing a crisis of repayments, if the growth in quantum of debt being sought to be restructured is any indication. Burgeoning interest costs, input prices and slowing growth have led to excess capacity additions, which continue to pose cash flow problems for the corporate sector.
The latest additions to the list of companies seeking debt recast are Electrotherm India and Jai Balaji, which are looking to restructure debt totaling over Rs 5000 crore.
According to banking sources, lenders have referred over Rs 3000 cr debt of Electrotherm India, a metal engineering company, for CDR. Lenders have also have also proposed to restructure Rs 2200 cr debt of Jai Balaji via CDR. Both companies are seeking to extend their repayment period of loans along with a reduction in interest rates.
With more and more corporates choosing this option, the Corporate Debt Restructuring (CDR) cell is now looking at over Rs 75,000 crore of corporate debt to be restructured in fiscal 2012, more than three times the Rs 25,000 crore in fiscal 2011, data from the CDR cell shows.
Most restructuring requests have come from iron and steel, road, telecom, and textile sectors. Noteable among these are companies like the GTL Group, Hotel Leela Ventures, Moser Baer and HCC. Banks have also restructured large scale state electricity board & aviation sector loans which have been outside of the CDR mechanism.
DEBT RESTRUCTURING TO CONTINUE RISING
Credit rating agency Standard & Poor’s credit analyst Geeta Chugh, in a recent conference call with media, said that restructured loans were expected to increase to around 4 per cent of total advances (of banking system) at the end of current financial year from 2.6 per cent a year ago. In 2012-13, restructured loans are expected to stand at 4-5 per cent of total advances.
In an exclusive interview with NDTV Profit, she also mentioned that “25-50 per cent of restructured loans are may slip into NPAs”.
Bankers, however, argue that historically, about 15-20 per cent of restructured loans have become non-performing assets (NPAs), and there does not seem to be any major cause for worry. As interest rates ease going forward, and macro-economic fundamentals gradually improve, many of these loans may get upgraded and are likely to become standard over the next 3-4 years.
ANALYSTS REMAIN CAUTIOUS
In this rising tide of restructuring, it is public sector banks that stand to lose the most, warn analysts, who say that between four and six per cent of their loans are restructured.
In a recent research report Macquarie Equities says that some of the (CDR) proposals include conversion of debt to equity which is worrying as it indicates the seriousness of the situation.
“Note this doesn’t include bilateral restructuring that happens between a bank and a corporate. The CDR restructuring just constituted 20 per cent of overall restructuring done in the past two years. So actual restructuring of loans could be much higher in our view,” said Research analyst Suresh Ganapathy at Macquarie Equities.
He also highlighted that NPA coverage ratio for most banks are below the RBI’s requirement of 70 per cent. “We expect further burden on provisions going ahead which could keep credit costs at elevated levels,” he added.
UCO Bank, Allahabad Bank and SBI have about Rs 300 cr exposure each to Jai Balaji, while Bank of India is the largest lender to Electrotherm, having exposure of about Rs 630 cr.
Among private sector banks, ICICI Bank may report high restructured loans in the March and June 2012, analysts caution. Macquarie also downgraded ICICI Bank to Neutral rating from Outperform, citing rising quantum of loan restructuring as the catalyst.
“Going ahead, the quantum of restructured assets is expected to pick up. We don’t expect asset quality to deteriorate to the extent seen in the previous cycle,” Macquarie said in its report, adding that there is stress in certain mid-corporate and power sector exposures that ICICI has put on its books. These are likely to be restructured over the course of the next few years, according to Macquarie.
Already, Bank of India and Union Bank have been downgraded by a notch each by ratings agency Moody’s over worries about their asset quality.
RBI’s REVISED GUIDELINES AWAITED
The Reserve Bank of India, meanwhile, is confident of the resilience of the system it regulates. The central bank does not see systemic risk to the banking system due to restructuring.
In a recent meeting with the country’s top bankers, the RBI’s top officials discussed the rising bad loan situation and highlighted need for close monitoring of borrower accounts. Bankers also await revised guidelines on loan restructuring from the regulator.
"NPA restructuring definition should have a timeline," Pratip Chaudhuri, Chairman of the State Bank of India told reporters after the meeting then.
"We have said if an account adheres to revised payment schedule, for about a year or two, it should be converted to standard asset category.”
If RBI allows this re-classification, banks may then have to make lower provisioning and will also be able to report lower quantum of restructured loans, which they hope, will alleviate some of the negative sentiments surrounding loan restructuring.
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