Mumbai: Slowing growth in Asia’s third largest economy, high cost of money, and project delays are denting the ability of Indian companies to repay their loans, leading to an unprecedented surge in restructured assets.
Total loans restructured by Indian banks under the so-called corporate debt restructuring (CDR) route crossed Rs.2 trillion in December. In the October-December quarter, banks restructured Rs.24,584 crore of loans, up from Rs.19,544 crore they recast in the previous quarter, to reach Rs.2.12 trillion.
Under CDR, commercial banks typically stretch the repayment period to stressed companies, offer a moratorium and reduce lending rates, among other things. In the event of a restructured loan turning bad, the provisioning liability shoots up to 15% from 0.4% for loans that are standard.
Many analysts suspect that 25-30% of the restructured loans may turn bad unless there is a significant revival in the economy.
“There is definitely more pain to come as more cases are likely to come up for restructuring, especially from money given to infrastructure sector,” said V. Sri Karthik, an analyst at Espirito Santo Securities India Pvt. Ltd.
In the current fiscal year, banks have recast Rs.62,085 crore under CDR, around 50% more than the restructured loans in the whole of last year. Banks have overall restructured Rs.2.11 trillion of loans from 362 cases through the CDR route.
The actual figure of restructured loans might be nearly double this estimate as it does not include bilateral restructuring cases that banks undertake individually with companies.
Such a rise is significant as most analysts believe that banks will have to recast more loans in the approaching months, given the slow pace of recovery in India’s economic growth and lower prospects of aggressive rate cuts by the Reserve Bank of India (RBI) as inflation continues to remain beyond its comfort zone.
Indian banks began restructuring on a massive scale in 2008 for loans given to property developers and small and medium enterprises in the aftermath of the global financial crisis that followed the collapse of US investment bank Lehman Brothers Holdings Inc.
At that time, the recasts were done after RBI gave special dispensation to banks to recast loans to certain segments without classifying them as substandard assets.
“While 15-20% of those loans have turned bad during the 2008 cycle, the percentage could be 25-30% this time as the recovery in growth is slow and chances of a rapid cut in interest rates are less unlike in 2008-09,” Karthik said.
Hit by global and domestic factors, India’s economic growth slowed to 5.3% in the September quarter from 5.5% in the preceding three months. RBI is yet to heed a widespread demand for a rate cut to prop up growth, citing persistently high inflation.
Bad loan levels in the banking system have spiked in the past few years because of a slowing economy. Gross non-performing assets (NPAs) of 40 listed Indian banks rose to Rs.1.66 trillion in September, up 46.8% from a year-ago period.
Among the large banks that have the maximum amount of NPAs are the nation’s largest lender State Bank of India (5.15%), Central Bank of India (5.54%), UCO Bank (4.88%) and Punjab National Bank (4.66%).
“Increasing loan recasts are certainly a concern and this will definitely have an impact on the profitability of banks,” said Ananda Bhoumik, a senior director at India Ratings and Research Pvt. Ltd, formerly known as Fitch India.
Stress in many sectors is likely to ease towards June when a pick-up in economic growth is widely expected, though problems pertaining to the infrastructure sector, where clearance bottlenecks often lead to project delays, are likely to persist, Bhoumik said.
Bankers said they are left with few options but to recast the loans of their troubled borrowers.
“It is indeed a risk, but not an extremely large risk and unmanageable. This is a reflection of a slowing economy,” said Arun Kaul, chairman and managing director of Kolkata-based state-run UCO Bank.
Kaul, however, is optimistic about a recovery. “Most of the financial indicators indicate that the worst is over and things will start improving from now on,” Kaul said.
Rating agencies are keeping a close tab on the rise in the restructured loans and resultant stress in the system. Crisil Ltd, the Indian unit of global rating agency Standard and Poor’s, expects the total loans restructured by Indian banks to touch Rs.3.25 trillion by March 2013. Crisil had earlier predicted Rs.2 trillion by March.
In a report released on Monday, global rating agency Moody’s Investors Service said the credit outlook for banks in the Asia-Pacific region in 2013 remains stable on the expectation that they will remain insulated from the negative credit pressures that are affecting western banks, but banks in India and Vietnam continue to carry negative outlook owing to their asset quality pressures.
According to Moody’s, impaired loans are yet to peak in India among public sector banks. “While the government is likely to remain supportive, relatively high inflation and modest fiscal capacity mean that policy options are constrained,” the report said.
A major chunk of the restructuring between October and December emerged from the iron and steel, infrastructure, textiles and construction sectors. Ironically, most of the restructuring burden is on state-run banks, which have a substantial exposure to troubled sectors such as iron and steel, textiles and power.
These lenders are often forced by the government, the majority shareholder in these banks, to restructure loans. For instance, in May last year, the government had announced a Rs.35,000 crore debt-restructuring package for troubled textile companies through public sector banks.