Mumbai: The government will direct banks to recast Rs 35,000 crore of loans to the textile industry, increasing the restructuring burden on banks and forcing them to either give these companies more time to pay back loans or reduce their interest rate.
After a meeting with finance minister Pranab Mukherjee, commerce and industry minister Anand Sharma announced that the government has agreed “to support the textiles industry in this time of crisis.”
“The total outstanding debt of textiles sector is Rs 1.55 trillion, of which debt of Rs 35,000 crore needs restructuring. Government directions to banks to consider this on priority would be issued in this regard,” a government release said on Tuesday.
Sharma, who is also textile minister, had met Mukherjee for consultations on India’s foreign trade policy, which takes stock of the country’s trade position and announces incentives if required. The policy is due for release on 5 June.
“There was agreement with the ministry of finance that the debt-restructuring package would be considered on a case-to-case basis by individual banks,” the press release said. “Ministry of finance would examine in consultation with Reserve Bank of India (RBI) for a two-year moratorium on term loans, special provision in NPA (non-performing asset) norms to avoid asset reclassification and working capital eroded to be converted into working capital term loans repayable over a period of three-five years.”
The restructuring proposal, if it goes through, will add to the bulge in loan revamps by the banking sector. Last month, rating agency Crisil Ltd said loans of Rs 75,000 crore had either been restructured or their recast was under way in the nine months ended December 2011.
Crisil expects the total restructured loans to near Rs.2 trillion in the two years ending 31 March.
M.D. Mallya, chairman and managing director of state-owned Bank of Baroda and chairman of the Indian Banks’ Association, said restructuring will be possible only if the textile units are commericially viable.
“This industry has been in trouble because of market fluctuations like cotton yarn prices rising and then falling suddenly or because export sops have been withdrawn,” he said. “It’s a very cyclical industry and a significant contributor in the overall economic context, but relief to this sector will depend on the viability.”
Mallya said he will wait for government directions before finalizing plans.
The government is likely to form an inter-ministerial committee of senior officials to coordinate between the industry and banks to expedite restructuring, the government release said.
Nilanjan Karfa, a banking analyst at Brics Securities Ltd, said though the problems in the textile sector were known, the market did not expect such a sweeping restructuring.
“One way it’s good that they are restructuring for the whole industry and it’s not a loan waiver like a farm waiver we had some years ago. Textile is always a highly leveraged sector with public sector banks having high exposures. It is fair to assume that public sector banks will bear the brunt of this restructuring and private banks will escape,” Karfa said.
Arvind Singhal, chairman of consultant Technopak Advisors Pvt. Ltd, said financial stress is spread across all textile companies, large and small.
“A lot of companies have eroded their net worth to the point of being declared sick as they undertook reckless expansion over the last decade,” he said. “Moreover, as most textile companies were exporters, they also borrowed overseas due to lower borrowing costs.” The economic slowdown coupled with currency fluctuations hampered their ability to service the debts, he said.
Niraj Jiwrajka, promoter of Alok Industries Ltd, said his company wasn’t seeking any debt restructuring currently.