Indian banks have cumulatively restructured more than Rs.2.5 trillion of loans under a popular mechanism created by the central bank in 2005, with a significant portion of this being done in recent quarters and years—an indication of rash bets taken by borrowers and accommodating lending rules followed by lenders in the earlier easy money regime and the impact of the economic slowdown.
According to two officials of the corporate debt restructuring (CDR) cell who did not want to be identified, the Rs.2.5 trillion milestone was crossed in June.
India’s slowing economy, which grew at a 10-year-low of 5% in the fiscal year ended March, continues to affect the ability of companies to repay money borrowed from banks, forcing many lenders to restructure the loans in an effort to prevent them from turning bad. Banks have to set aside (or provision) more money for bad loans (or non-performing assets) than restructured ones.
Experts say that companies have also been hit by delays in government approvals for projects.
The CDR cell is a forum of banks that seeks to assist companies that can’t repay their loans by extending the payback period, reducing the interest rate, providing a repayment holiday (or moratorium), converting part of the loan into equity and even writing down the loan amount.
Debt can be restructured under the CDR facility only if 60% of the banks that have loaned money and banks that have loaned at least 75% of the total amount agree to the restructuring (both conditions have to be met).
In the three months ended 30 June, banks restructured the debt of 12 companies, totalling Rs.20,000 crore. This included the restructuring of Rs.13,500 crore of debt of engineering and construction firm Gammon India Ltd and Rs.3,000 crore of debt of logistics company Arshiya International Ltd.
In Gammon’s case, the banks agreed to stretch the loan repayment period to 10 years and to a moratorium of two years. They also agreed to a 1-2 percentage point reduction in the interest rate to 11-12%.
In the three months ended 31 March, banks restructured around Rs.15,000 crore of debt. The pace of restructuring has clearly increased even as companies are now required to make provisions for such loans. Under new RBI rules, banks need to set aside 5% of the fresh restructured loans as provisions. If loans turn bad, the provisioning goes up to at least 15%. Higher provisioning affects the profitability of banks.
In 2012-13, banks restructured Rs.75,000 crore of loans under the CDR mechanism, nearly double what they did in 2011-12. Analysts estimate that between a fifth and a fourth of such restructured loans turn bad.
“There is definitely a concern,” said Arun Kaul, chairman and managing director of Kolkata-based state-run lender UCO Bank. “That is the reason why the Reserve Bank of India has increased the provisioning for restructured loans, but it is incorrect to believe that all of the restructured loans are going to turn bad.”
Like many of his colleagues in the industry, Kaul too is optimistic about an improvement once the economy starts growing faster.
Economists aren’t as bullish.
“Even if the economy recovers in a significant manner and investor confidence returns, the lag effects of the slowdown and high interest cost in the economy will continue to impact Indian firms for the next one-two years,” said Madan Sabnavis, chief economist at rating agency CARE Ltd.
Still, the economy has bottomed out and “things can only get better from here”, Sabnavis said. India’s economy expanded 4.8% in the January-March quarter.
This year, the government estimates that the economy will expand by 6.1-6.7%. According to the finance ministry, around 215 infrastructure projects, involving a collective investment of at least Rs.7 trillion, have been stalled. A revival of these projects will improve the financial position of the companies behind them.
Experts say that they believe data on loans restructured under the CDR facility do not reflect reality because banks also do so-called bilateral restructuring. Bankers say no numbers are readily available for the loans thus restructured, but admit that, in general, for every rupee restructured under CDR, another is recast bilaterally. Some put the total value of restructured debt in the banking system at around Rs.4 trillion, or 6-7% of the total loans issued by Indian banks.
“General indicators tell us that (such) restructuring will continue for at least one-two years, which would put pressure on the balance sheets of banks. Public sector banks will continue to bear the burden,” said Vaibhav Agarwal, vice-president (research) at Angel Broking Ltd.
A more accurate indicator of how things will pan out in the approaching quarters will emerge only after banks announce their June quarter numbers, Agarwal said.
Total gross non-performing assets of 40 listed Indian banks grew to Rs.1.8 trillion at the end of the March quarter, 36% up from Rs.1.32 trillion in the year ago.
Large-scale restructuring of loans given to firms began in the aftermath of the 2008 global financial crisis. A liquidity crunch that followed the crisis and the slowdown in global markets affected companies in India too, forcing banks to recast loans across sectors such as textiles, real estate, power, and gems and jewellery. About 10-15% of the loans restructured then are believed to have turned bad.
This time the proportion could be higher, said analysts, because RBI has been slow to exit from its tight monetary stance. In 2008-09, the central bank sharply reduced policy rates to breathe life back into the economy. This time, persistent inflation has stayed its hand.