Banks are rushing to restructure loans amounting to ₹40,000-50,000 crore to avoid classifying them as bad loans. Once the new restructuring guideline kicks in on April 1, banks will have no option but to classify stressed assets as bad loans. For this, they will have to set aside higher provisions (or capital buffer) which will eat into the profits.
A loan is restructured when a borrower faces genuine difficulty in servicing the loan. Restructuring of loans involves banks offering interest rate concession and extending the repayment period, thus helping the borrower and ensuring that the asset classification does not deteriorate.
Around 25 per cent of fresh NPAs (non-performing assets) generated in the third quarter of this fiscal (2014-15) are from restructured advances, as per an ICRA report. The restructuring could remain elevated in the January-March period too as regulatory forbearance will cease from FY16.
“The restructured assets in the January-March period could be in the range of ₹40,000-50,000 crore for the banking sector,” said Vibha Batra, Senior Vice-President and Group Head - Financial Sector Ratings, ICRA.
Batra added that the restructured assets slipping to NPAs annually are expected to continue at 12-15 per cent. Fresh NPA generation next year will be 3.5-4.5 per cent.
While referrals to the CDR (corporate debt restructuring) cell declined in the first nine months of this fiscal compared to the corresponding year-ago period, restructuring outside CDR cell remains high.
CDR accounted for one-third of total restructured loans, and the balance fell under bilateral restructuring. Going by past trends, 35-40 per cent of the ₹2.7-lakh crore live advances under CDR may fail.
Worrying trendMost public sector banks have shown a worrying trend of close to 5 per cent rise in non-performing loans.
The country’s largest lender State Bank of India estimates ₹5,500 crore worth loans may be restructured by March-end.
“It is a little on the higher side as we do not know what will happen during the quarter. Also, when we have a particular window closing, there is a bit of a rush and so I am giving a higher number though our internal number could be slightly lower,” Arundhati Bhattacharya, Chairperson and Managing Director of SBI, said recently.
SBI restructured ₹4,092 crore worth assets in the third quarter. The bank’s overall restructured assets, which stood at ₹58,938 crore at the beginning of the financial year, rose to ₹66,704 crore as on December-end.
Most public sector banks saw a spike in deterioration of asset quality. Standard restructured advances of PSBs as on December 2014 were at about 6.5 per cent (up from 6 per cent in December 2013), while for private banks it was about 2 per cent. Gross NPAs were as high as 5.1 per cent for PSBs and 2.1 per cent for private banks.
Five major sectors — infrastructure, iron and steel, textiles, aviation and mining — contributed to 52 per cent of banks’ total stressed advances while share of credit to these sectors was 24 per cent. PSBs’ exposure to stressed sectors is estimated to be higher at around 27-30 per cent as compared with 15 per cent for private sector banks.
Slippages from restructured accounts, fresh flow into restructured accounts in the January-March 2015 period and recoveries from NPAs would determine the asset quality in future.