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Business News/ Industry / Banks rush to restructure bad loans before rule change
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Banks rush to restructure bad loans before rule change

Loans worth at least Rs16,000 crore were restructured via the corporate debt restructuring (CDR) cell, says a banker

On 1 April, the so-called regulatory forbearance provided to restructured loans, allowing them to be classified as standard assets, which attract lower provisions, will expire. Photo: Mint Premium
On 1 April, the so-called regulatory forbearance provided to restructured loans, allowing them to be classified as standard assets, which attract lower provisions, will expire. Photo: Mint

Bankers moved to recast bulky loans in the January-March quarter ahead of a change in rules which will lead to restructured loans being categorized as bad loans, attracting a minimum provision of 15%.

On 1 April, the so-called regulatory forbearance provided to restructured loans, allowing them to be classified as standard assets, which attract lower provisions, will expire.

To beat that deadline, loans worth at least 16,000 crore were restructured via the corporate debt restructuring (CDR) cell, said a banker at the cell on condition of anonymity, as he is not allowed to be quoted by the press.

7,600 crore worth of loans given to Pipavav Defence and Offshore Engineering Co. Ltd was among the large restructuring cases approved this quarter, Mint reported on 25 March.

Another large case which has been approved for restructuring this month is 5,000 crore worth of debt of Kolkata-based Concast Group, said the banker cited above.

During the full financial year 2014-15, loans worth 65,000-70,000 crore have been restructured at the CDR cell—lower than the 1 trillion approved for restructuring in fiscal 2014.

Bankers expect the pace of restructuring to slow down further in the next financial year, partly due to the change in rules, which will mean that bankers will be more selective in restructuring high-value cases.

Under the forbearance provided by the Reserve Bank of India (RBI) to restructured loans, in the first year after restructuring, the asset attracted 5% provisions.

However, over and above that, banks also set aside provisions on the haircut they agreed to take on the asset and the interest that they agreed to forgo as part of any payment moratorium agreed upon as part of the restructuring package.

This means that the total provision was comparable to those made for bad loans, at least in the first year.

“The total provision would work out to 10-15%. So, technically, there is no difference between an asset with or without forbearance during the first year. However, in the second and third year, an asset attracts higher provisions without any forbearance. That is where the impact would play out," said R.K. Bansal, executive director, IDBI Bank Ltd. Bansal is also the former chairman of the CDR cell.

Others bankers added that while there may be some increase in the need for provisions, the profitability impact will be partly offset by RBI’s decision to allow banks to use part of their counter-cyclical buffer for provisioning purposes.

On Monday, the central bank said that banks can now use up to 50% of the counter-cyclical provisioning held by them as of 31 December 2014, for making specific provisions on non-performing assets (NPAs), according to their board-approved policy.

In India, bank provisions above the compulsory 70% provision coverage ratio are considered as counter-cyclical.

“So as far as impact on profitablity is concerned, things are not that bad. However, the problem would come from higher NPAs. Since the first half of the new financial year is expected to be a slow-growing one, the ratio of bad loans may look even worse," said a second public sector banker on the condition of anonymity.

An increased NPA ratio will work against many public sector banks that are planning to raise capital in the new financial year to meet the Basel III norms.

According to the latest RBI data, overall stressed assets—the sum of restructured assets and bad loans—rose to 10.7% by the end of September 2014, compared to 10% in March 2014.

“Till now, bankers were using the CDR window as a medium to postpone the problems for two years or so and hoping for the economy to improve. Now, they will have to be extra cautious before approving any debt recast, since it will attract higher provisions," said Nirmal Gangwal, founder and managing director, Brescon Corporate Advisors, an independent financial advisory firm.

However, the second public sector banker cited above noted that restructuring for infrastructure assets may not be impacted as RBI had excluded them while removing the forbearance for restructured assets.

In the prudential guidelines on restructuring issued on 30 May 2013, the central bank stated that infrastructure and non-infrastructure projects where the date of commencement of commercial operation (DCCO) has been delayed can still be categorized as standard assets.

“The regulator has not removed the forbearance when it comes to delaying the date of commencement in projects loans. Considering that a large number of projects in the infrastructure sector delay their date of commercial operations, the current withdrawal of forbearance would not have that big an impact on them," said the banker.

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Published: 01 Apr 2015, 12:48 AM IST
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