The Indian banking system could see restructured loans surging by ₹1 lakh crore in the remaining five months of this financial year even as it may take a ‘big bath’ to address asset quality problems and start the next fiscal year on a clean slate, said credit rating agency India Ratings (Ind-Ra).
Painting this grim scenario, the agency said loan accounts whose performance may deteriorate could be addressed (restructured) at one go.
Restructuring of assets entails creditors (among others) extending concessions to borrowers by reducing interest rates, rescheduling repayments and converting debt into equity, and promoters infusing equity into their venture.
Ind-Ra based its estimates of restructured assets on an analysis of the credit metrics of the top 500 corporate borrowers, who accounted for the largest debt in the financial year that ended in March 2014.
The aggregate debt of these 500 corporates is ₹28,76,000 crore, which is 73 per cent of the total bank lending to the industry, services and export sectors.
Financially distressed Around 82 of these 500 top borrowers have already been formally tagged as financially distressed (as a non-performing asset, corporate debt restructuring case or restructured asset).
Another 83 (17 per cent) of these 500 borrowers, accounting for 9 per cent of the overall debt of the group, have severely stretched credit metrics, said Ind-Ra. The credit rating agency observed that within these 83 corporates, operating profitability barely covers the interest required to be serviced in most cases. These corporates have limited expectation of an immediate improvement in profitability.
However, thus far, these borrowers with severely weak credit metrics have not been publicly tagged as financially distressed. But one out of every four could be tagged as stressed by the end of March 2015.
Incremental restructuring Ind-Ra assessed that potentially one-third to half of the 83 accounts could be in the category of SMA 2 (special mention accounts), with delays in debt servicing ranging between 61 and 90 days.
Loan accounts, which may be tagged as SMA 2 during the October-December 2014 period, would be either normalised or put up for restructuring. This decision is to be arrived by the lenders by March 31 next year, it added.
If some of the corporates are unable to generate significant cash flow or infuse significant equity in the near term, they may be identified by their lenders for restructuring pursuant to RBI guidelines.
Some borrowers may even deteriorate further, to be tagged as NPAs. The cumulative impact may be an incremental ₹60,000 crore to ₹1 lakh crore of restructured assets in the banking system in the next five months, the report said.
A senior public sector bank official said given the tough situation in the economy, whereby infrastructure projects are stalled because of external factors and de-allocation of coal blocks will impact metal, power and cement companies, the central bank needs to come up with a special dispensation for asset classification.
“If the RBI sticks to its deadline of April 1, 2015, for complete withdrawal of regulatory forbearance, then banks will get impacted as not only will an asset be downgraded once it is restructured, they will also have to make higher provisions. This will shake investor confidence in banks,” he said.
VS Seshagiri Rao, Joint MD and CFO, JSW Steel, said banks have to take a practical call and come out with a special sector-specific dispensation on stressed assets.
Each sector, such as infrastructure, power, steel and textiles, is affected by different problems, largely due to factors beyond the purview of company promoters.
For instance, delays in project clearance and high pricing of raw material in domestic markets, especially coal, is eroding profitability of Indian companies.