The rate of growth in restructured advances of banks has been faster than the growth in total gross advances between March 2009 and March 2012, according to a top Reserve Bank of India official.
In the said period while total gross advances of the banking system grew at a compound annual growth rate of less than 20 per cent, restructured standard advances grew over 40 per cent, said K.C. Chakrabarty at a recent seminar on corporate debt restructuring.
The proportion of restructured standard advances to gross total advances increased from 3.45 per cent in March 2011 to 4.68 per cent in March 2012.
Chakrabarty said the increase in restructuring can be partially attributed to excessive leveraging by some borrowers during boom period. An analysis of the trends in leverage of the larger borrowers in the country during the first decade of this century certainly seems to suggest this.
Deficiencies in project appraisal
“There are deficiencies in the manner in which project appraisal is conducted especially with regard to cash flow analysis and determination of the date of completion of projects. When commercial operations are delayed, a host of factors, including the uncertainties surrounding the project, are cited as the reason,” said the Deputy Governor.
But, when there are uncertainties surrounding a project, Chakrabarty felt that these have to be accounted for during the appraisal of the project and a proper cushion needs to be built to take care of uncertainties.
Instead, the effort is to appraise a project keeping in view an aggressive repayment schedule resulting in a very short term focus of borrowers, banks and financial analysts who appraise the project. This short term focus, in many cases, is the reason for the need for successive restructuring, observed the Deputy Governor.
CDR under lens
Chakrabarty said the bank-wide Corporate Debt Restructuring (CDR) mechanism has come under the RBI attention because of the extraordinary rise in the number and volume of advances being restructured under the scheme in recent times.
Questions are being raised as to whether this indicates a general downturn or gross misuse of the CDR mechanism by banks and corporate borrowers.
According to the RBI data, restructured accounts have grown at a compound annual growth rate of 47.86 per cent in public sector banks (PSBs) as against a growth rate of credit of 19.57 per cent.
The corresponding figures for private sector and foreign banks are 8.12 per cent (restructured advances) and 19.88 per cent (credit growth) and (-) 25.48 per cent (restructured advances) and 10.96 per cent (credit growth) respectively.
Further, as on March 2012, the ratio of restructured standard advances to total gross advances is highest for PSBs at 5.73 per cent, while the ratio is significantly lower for private and foreign banks at 1.61 per cent and 0.22 per cent, respectively.
Chakrabarty said it is clearly observed that public sector banks share a disproportionate burden of restructured accounts.