Mumbai: Textile companies, hit by a sharp fall in cotton yarn prices, poor domestic demand and curbs on cotton yarn exports imposed in December, may get some relief on loan repayments that amount to about Rs 7,000 crore annually for the industry.
Indian banks are planning to restructure some of these loans, having agreed in principle to do so on a case-by-case basis after assessing the cash flows of these companies, according to an official at the Indian Banks’ Association (IBA) and senior bankers. The official at banking lobby group didn’t want to be named.
This won’t be a bailout as there is no infusion of cash and neither will banks take a haircut, or a reduced payment.
“Banks have taken into account the current difficult situation of the sector and have agreed to restructure those loans where the borrowers are facing difficulties because of external circumstances,” the IBA official said. “There won’t be any industry-wide recast (of loans).”
Indian banks have been actively assisting crisis-ridden sectors in the aftermath of the 2008 global financial crisis. Currently, they are recasting loans given to borrowers in the airline, real estate and microfinance sectors, although the reasons behind the various borrowers’ distress vary.
In the wake of the global financial meltdown, Indian banks restructured at least 5% of their loans across sectors following a directive of the banking regulator. About 10-15% of these restructured loans have turned bad for most lenders, according to data from rating agency Credit Analysis and Research Ltd.
Chiefs of around 20 banks, at an IBA meeting in late July, agreed to recast loans when merited, the IBA official said.
Such assistance won’t be restricted to textiles, said a top banker.
“We are willing to restructure the loans given to these firms on a case-to-case basis, not only in textiles, but across sectors, wherever the stress is there,” said K.R. Kamath, chairman and managing director of Punjab National Bank.
Indian banks have lent Rs 1.45 trillion to textile firms as of 20 May, according to the latest Reserve Bank of India data. Credit grew 21% on a year-on-year basis, higher than the 19% growth registered in the previous year.
According to the Confederation of Indian Textile Industry (CITI), an umbrella organization, textile companies have to repay around Rs 7,000 crore to banks every year, including interest payments of Rs 2,000 crore, under a government scheme that made available subsidized loans to the industry for capacity-building and modernization.
CITI estimates the textile industry’s accumulated loss at about Rs 11,000 crore.
“The second quarter results of most of the textile mills are likely to be very bad because of huge losses they have suffered on account of high cost of raw material and unsold goods in stock,” said D.K. Nair, CITI secretary general.
Senior bankers said they will examine the possibility of loan recast, but don’t see an alarming situation as of now.
The sector is facing a problem, but bankers have not come across any serious issues, said Ramnath Pradeep, chairman and managing director of Corporation Bank.
“Depending upon the need of the sector, we will take adequate steps,” he said.
M. Narendra, chairman and managing director of Indian Overseas Bank, said one large textile company has already defaulted, but expects the situation to improve in the next few months.
If banks do not recast loans, in the case of defaults they will have to set aside money or provide for the bad loans, which will adversely impact profitability.
The $62 billion (Rs 2.75 trillion) Indian textile industry is facing a crisis due to the steep fall in the prices of cotton and cotton yarn since March 2010, and low demand for products. Between April and July, the price of Shankar-6, the standard variety of Indian cotton, fell to Rs 30,000 per candy from Rs 60,000 per candy in April. One candy is equal to 356kg.
According to senior industry officials, this resulted in stockpiling to the tune of 6.5 million bales as on 1 June. Following this, CITI approached Indian banks with a request for loan restructuring.
The industry had sought a two-year moratorium for troubled firms and a reduction in loan rates to facilitate easy repayment.
Many firms may stop payments in the next few months unless there is bank assistance, said Kamal Oswal, managing director of Ludhiana-based Nahar Industrial Enterprises Ltd.
“The situation is not good because of the stoppage of cotton yarn exports last year,” Oswal said. “As of now, companies are stuck with very heavy inventory of cotton and yarn.”
The government capped cotton yarn exports in 2010-11 at 720 million kg against the industry demand for 1,100 million kg leading to the inventory pile-up, CITI’s Nair said.
“Besides the impact of an economic slowdown, the imposition of a 10% excise duty has also impacted the demand,” he said.
Nearly 70% of the total textile industry’s products are cotton-based.
Experts said companies largely dependent on exports may face a tough time compared with firms that depend on domestic demand.
“The current situation in the sector is largely due to the slump in demand and higher input costs. There was some amount of speculation also as some companies were expecting commodity prices to stay on the higher side,” said J. Moses Harding, executive vice-president and head (global markets group) at IndusInd Bank Ltd.
Anup Roy contributed to this story.