Mumbai: The pace of growth in the restructured loan pile of India’s 75 trillion banking industry on the so-called corporate debt restructuring (CDR) platform declined in the three months ended March for the first time in four quarters, signalling a gradual improvement in the financial health of Indian companies. Yet, the recovery is too nascent to deem it sustainable, experts say.

CDR refers to the practice of banks assisting stressed borrowers by stretching their loan repayment periods, offering a moratorium on repayment, and/or even slashing the borrowing cost.

Banks set aside 2.75% of the loan amount to cover such restructuring, but the provisioning shoots up to 15% when a restructured loan turns bad.

The latest data from the CDR cell suggests that Indian banks added 15,016 crore of restructured loans in the March quarter, about 9,000 crore less than what they had done in the preceding quarter. On a cumulative basis, total restructured loans crossed 2.27 trillion, or 4.4% of the total loans given by Indian banks.

The CDR cell is a forum of banks whose membership comprises leading lenders and industry lobby Indian Banks’ Association.

Indian banks have been hit by a surge of bad loans in the face of declining economic growth, estimated at a decade’s low of 5% in the year ended 31 March, project delays and high interest rates that have made it difficult for borrowers to repay debt. Lenders have been easing repayment terms to avoid classifying them as bad assets.

The CDR numbers do not reflect the actual pile-up of restructured loans in the banking system because lenders also recast loans outside the CDR platform, on a bilateral basis.

The aggregate figure for bilateral loan recasts is not available, but bankers said such recasts may nearly equal the CDR figure. That would take the total restructured assets of the Indian banking industry to around 4 trillion.

In the whole of fiscal 2012-13, Indian banks restructured a total of 77,101 crore of loans through the CDR route, nearly double the amount in the previous fiscal ( 40,000 crore). Analysts expect about 25-30% of such loans to turn bad.

Iron and steel contributed most to the restructured loan pile—23%—followed by infrastructure (9.65%) and power (8.13%). The textile, telecom and fertilizer sectors, and non-banking finance companies, too, are high on the list.

Despite a decline in the CDR numbers in the March quarter, bankers and financial sector analysts are sceptical about a sustainable revival at Indian companies. The pain associated with mounting bad loans is unlikely to ease at least in the next six months, they said.

“The worst could be over for Indian banks," said a senior official at State Bank of India (SBI), who spoke on condition of anonymity. “But this doesn’t mean that restructuring cases are over. There is more in store for at least the next two quarters. Things may improve after that, provided the economy revives."

The reason for the decline in restructured loans in the March quarter, the SBI official said, was the absence of large corporate debt recasts.

“It’s a bit surprising to see that CDR numbers are coming down as the overall stress across sectors still persists. There have been quite a few restructuring cases that have happened outside the CDR platform," said Vaibhav Agrawal, a research analyst at Angel Broking Ltd.

Agarwal expects an improvement in the bad debt situation only in the second half of fiscal year 2014.

Increasing bad loans on the books of Indian banks, primarily government-owned ones, have been a source of worry for policymakers.

Gross non-performing assets (NPAs) of 40 listed Indian banks rose to 1.79 trillion in December from 1.25 trillion a year ago, an increase of 43.1%. In the past, the Reserve Bank of India (RBI) had cautioned banks about the need for enhanced risk assessment tools to monitor loan quality.

“We have to arrest the trend (of rising NPAs)," RBI deputy governor Anand Sinha said in February at an event in Mumbai. “This is a concern, but it is not a systemic risk; it needs to be monitored."

The central bank is reluctant to blame the slowing economy as the sole reason for the increase in bad assets. The stress is also because of delays in project clearance, the piling up of inventory and changes in policy.

In its December financial stability report, RBI said deteriorating asset quality of banks will pose a challenge in a smooth transition towards new international capital adequacy norms that kick in from April under the Basel III regime.

“Indian banks will face challenges as they migrate to Basel III, given the declining asset quality and regulatory changes necessitating additional provisioning," the report warned.

Rating agencies share this concern. Icra Ltd, in which Moody’s Investors Service has a significant stake, on Tuesday warned of continuing pressure on the credit quality of Indian companies because of factors such as a difficult operating environment, strain on profitability, demand pressures and cash flow-related issues.

Besides an uncertain global environment, the limited scope for monetary easing will weigh on Indian firms in the coming quarters, the agency said.

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