Systemic, cyclical problem across sectors, says Crisil

Loan restructuring by banks could soar to Rs 3.25 lakh crore this fiscal against the earlier estimate of Rs 2 lakh crore.

According to credit rating agency Crisil, this is because of the serious funding challenge companies with large debt face.

A chunk of the restructuring will be of loans to State power utilities, and firms in the construction and infrastructure sectors. Crisil cautioned that any significant and sustained deterioration in the asset quality and earnings of these units can weaken banks’ credit quality.

Loans worth Rs 1.6 lakh crore were restructured in 2011-12 and the first quarter of this fiscal.

Ramraj Pai, President, Crisil Ratings, said: “2012 is going to be challenging for banks and companies. The problem (loan restructuring) is both systemic and cyclical, cutting across sectors.”

In a statement, Crisil said the proportion of restructured loans in the April 2012-March 2013 period will be high at around 5.7 per cent of banks’ advances.

Pawan Agrawal, Senior Director, Crisil said, “Around Rs 50,000 crore of the restructured loans may slip into the non-performing category… These slippages can aggravate the stressed asset quality of banks by increasing NPAs (non-performing assets) by 50-75 basis points beyond March 2013.”

Further, the inability to raise equity on time is straining the balance-sheets and financial flexibility of developers in infrastructure and construction sectors, resulting in increased need for restructuring.

Power Utilities

In recent months, there has been a dip in the availability of unsecured short-term loans from banks. This is exacerbating the refinancing and liquidity pressure, especially for the State power utilities. This will lead to a significant jump in in the restructuring of loans to the State power utilities to nearly Rs 1.5 lakh crore. So far, their loans aggregating to Rs 60,000 crore have been restructured, said Crisil.

However, the loans to the State power utilities are unlikely to become NPAs, given the support expected from Union and State governments and the possibility of tariff hike.

According to Pai, despite the hike in tariffs, the distribution companies would suffer due to losses they made before the tariff hike. Tariff hikes can bring temporary respite and incremental losses might be minimised. The companies need to keep increasing the tariffs over the next two years.

Despite continued weak growth and profitability in the corporate sector, the large restructuring will help limit the increase in the banks’ NPAs.

According to Crisil’s estimates, the lower GDP growth of 5.5 per cent expected in 2012-13 may end up increasing banks’ gross NPAs to 3.5 per cent of their total advances by end-March 2013 from around 3 per cent at the end of June 2012. The increase will be driven largely by delinquencies in the micro, small and medium enterprises, and agriculture and allied sectors.

B. Ravindranath, Chairman, CDR Cell, had earlier told Business Line that a large number of corporate debt restructuring cases with lower debt exposure (Rs 200-500 crore) are being referred to the Cell. Earlier, the situation was the other way round: Few corporates with debts running into a few thousand crore rupees would come for restructuring.

At a recent seminar, K. C. Chakrabarty, Deputy Governor, Reserve Bank of India, said the increase in restructuring can be partially attributed to excessive borrowing by some corporates during boom periods. He said there are deficiencies in project appraisal, especially with regard to cash flow analysis and the determination of the date of project completion.

(This article was published on August 30, 2012)
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