Banks step up restructuring of stressed assets6 min read . Updated: 27 Oct 2014, 10:55 PM IST
Fourteen cases worth `13,300 cr were referred to corporate debt restructuring cell in the September quarter against two cases worth `2,854 cr in Q1
Mumbai: Indian banks have only two quarters left to restructure stressed assets without significantly dragging down their profits—a fact that’s prompting banks to step up the recast of loans that may eventually need restructuring.
Effective 1 April 2015, the Reserve Bank of India’s regulatory forbearance, under which banks were allowed to qualify restructured assets as standard, will come to an end.
For now banks are setting aside 5% of the value of the loan to cover the risk of default on any restructured assets. Starting in the next financial year, when all restructured assets will be termed as non performing assets (NPAs), or bad loans, the requirement will increase to a minimum 15%.
The change will also mean banks’ bad-loan portfolio will swell.
In fact, fearing an increase in bad assets once change takes effect, bankers have already started asking RBI to extend the forbearance for another year, the Business Standard reported on 15 October. The bankers, according to the report, have told RBI that if the window is not extended, their gross NPA ratio will rise to 10% from 4% in March 2014.
Bad loans in the banking system rose to 4.03% of total advances in 2013-14 from 3.42% in 2012-13 and 2.94% in 2011-12, finance minister Arun Jaitley told the Parliament on 1 August, as slower economic growth and delays in securing statutory approvals such as environmental clearances and completing land acquisition stalled many big-ticket projects, hurting companies’ ability to generate cash flows and repay loans on time. The economy grew less than 5% in each of the previous two years.
To fend off some of the negative impact of higher NPAs and increased provisioning that will be required from next year, banks appear to be hastening restructuring.
“Restructuring is not a bad thing. The economy is not out of the woods and a lot of companies are under stress," said a senior public sector banker who didn’t want to be named.
Restructuring through so-called joint lenders’ forum or the corporate debt restructuring (CDR) mechanisms will “continue to happen, but we won’t get the regulatory leeway if we restructure after six months", the banker said.
“So for a few cases, where we know for sure restructuring will be required in the coming quarters, we are fast-tracking the process to save precious capital. There is nothing wrong in it," he added.
This increased pace of restructuring is showing up in data from the CDR cell. In the three months ended 30 June, referrals to the CDR cell fell to only two cases, amounting to ₹ 2,854 crore, according to data on the CDR cell website.
In the three months ended 30 September, 14 cases, totalling ₹ 13,300 crore, were referred to the cell. Of the referrals, seven cases involving a combined ₹ 6,000 crore of loans came in September alone. Among these was Shriram EPC Ltd’s ₹ 2,400 crore loan. On 11 September, Shriram EPC informed the BSE that its board had approved a scheme of restructuring.
To be sure, the fall in debt restructuring cases in the first quarter was also partly due to a new stressed asset framework under which banks were required to form a JLF to monitor accounts of ₹ 100 crore and above that are overdue by more than 60 days.
The JLF can together choose to give additional funds to a stressed borrower, or restructure, or initiate recovery if they feel their loan is under threat.
The new rules were effective 1 April.
“It took a full quarter for banks to understand how the JLF should function. Companies also requested us not to put them in CDR because that puts lot of restriction on them, hence the low referrals in the first quarter," said another senior public sector banker who did not want to be named.
Once a company is in CDR, its operating freedom is curtailed as banks keep a close eye on the activities of the management and sometimes push the companies to sell assets to recover their dues. The companies also find it difficult to raise additional funds from the market.
“Besides, companies were hoping that with a stable government at the centre, the macro-economic situation will improve fast, but nothing much came in the July budget and then the recent coal de-allocation has dashed hopes of companies for a quick turnaround. Referrals in the second quarter is now back to normal," said the banker quoted above.
However, bankers add that restructuring in the current fiscal is unlikely to rise above the levels seen in previous years. Rating agency Crisil Ltd estimates that restructuring in fiscal years 2012, 2013 and 2014 were to the tune of ₹ 1.2 trillion, ₹ 1.6 trillion and ₹ 1.3 trillion, respectively.
Crisil expects the banking system to restructure ₹ 1 trillion of loans in fiscal 2015, out of which ₹ 30,000 crore was completed in the first quarter.
“The key reason is the existing pipeline of assets under restructuring, end of regulatory forbearance for restructured assets by March 2015, and continued pressure on the credit profile of leveraged companies. This will take the cumulative restructuring since April 2011 to nearly ₹ 5 lakh crore by March 2015," said Pawan Agrawal, senior director at Crisil Ratings.
Restructuring in fiscal 2016, the year when the regulatory forbearance ends, depends on a few key factors, explained Agrawal.
Apart from economic growth and the ability of firms to raise equity through sale of assets or otherwise, “success of the RBI norms related to revitalization of distressed assets, the effectiveness of JLFs and success of the policy measures (such as fuel availability, fuel pricing, and ease of land acquisition process) to address the viability of the infrastructure projects", will be key in determining restructuring in the next financial year, he said.
An emerging uncertainty which could add to the need for restructuring is the recent de-allocation of coal blocks following a Supreme Court order.
Bankers fear this will add to stress across power sector borrrowers, many of whom have already faced adverse operating circumstances due to issues such as inadequate fuel linkages. Loans to companies affected by the coal-block de-allocation may need restructuring, bankers say.
In a high-level meeting on 17 October between the finance ministry, power ministry, and bankers, power companies requested for special dispensation for their loans. The request is likely to be put across by bankers to RBI.
A special dispensation is restructuring outside the regular banking mechanisms such as CDR where accounts across an industry can be restructured without additional provision requirements. Typically, under such schemes, companies get a temporary moratorium and more time to repay loans and a change in interest rate terms.
“These are special extraordinary conditions and merit a dispensation by the central bank. If RBI allows us such a provision, then the stress on our books can come down significantly," said a banker who attended the 17 October meeting. He also spoke on condition of anonymity.
Banks’ exposure to the power sector is more than ₹ 5 trillion, banking secretary G.S. Sandhu said after the meeting. An 8 October report by India Ratings and Research Pvt. Ltd said the committed exposure of the banking sector to power projects affected by the Supreme Court verdict is around ₹ 90,000 crore, or about 1.2% of the banking system’s loans.