Why large corporate loans are turning bad

A study of the financial statements of various banks reveals that substantial non-performing assets (NPAs) have been added since June 2011. The data on a few public sector banks (PSBs) shown in the Table are cases in point.

Another study reveals that the Gross NPAs of peer banks — Punjab National Bank, Bank of Baroda, Bank of India, Canara Bank, Union Bank of India, IDBI Bank and Central Bank of India — have grown by 67 per cent year-on-year (y-o-y).

While much has been written about the incidence of loans to the educational, agricultural and MSME (micro, small and medium enterprise) segments turning bad, the main additions have been in large corporate advances many of which were restructured in 2008, taking advantage of the stimulus package announced by the RBI.

RBI norms

As per the present RBI guidelines, if the accounts are restructured before they become an NPA, they can be retained as standard assets even though provisioning has to be made for diminution in fair value of the assets.

If the recent recommendations of the RBI working panel were to be accepted, this concession will no longer be available and all restructured assets will have to be classified as NPAs. Between March 2009 and March 2011, NPAs of Indian banks rose from Rs 68,000 crore to Rs 94,000 crore while restructured assets grew from Rs 60,000 crore to Rs 1,07,000 crore.

The amount of loans referred to the CDR (corporate debt restructuring) cell is Rs 2,06,500 crore. Not much elaboration is needed on the enormity of the problem faced by banks.

What are the reasons for the sudden spurt in NPAs in the corporate sector? Global developments such as sluggish industrial growth worldwide in view of the continuing sovereign debt crisis in the Euro Zone, high international oil and commodity prices, and the tottering US economy have had a negative effect.

And, on the domestic front, our inability to contain inflation, including food inflation, widening current account deficit, higher fiscal deficit, grave power situation leading to total shutdown of, or reduced production in, many industrial units are some of the major factors resulting in many units not achieving the projections made at the time of sanction of these loans.

The RBI has raised repo rates 13 times since March 2010 resulting in higher interest cost for the corporates which became unserviceable due to dwindling bottom-line.

The fast depreciating rupee against the dollar is a matter of concern for companies which ultimately reflects in banks’ performance.

Depreciating rupee

The rupee has depreciated nearly 24 per cent during the last few months, as result of which the prices of petroleum products are increasing in India (even when international prices are coming down in dollar terms).

The reason for rupee depreciation is too complicated to be discussed here. But the long and short of the matter is that importers have to pay more for their import of raw materials as well as capital goods affecting their bottom-line. The depreciating rupee should normally be beneficial to the exporters, but with the economic crisis looming large over a major part of the developed countries, there are not enough orders coming in. Also, many exporters are unable to execute the export orders fully due to the precarious power situation.

The infrastructure sector is one where large amount of institutional finance is required. There are quite a few projects, especially in the power sector, where commercial production has not started even after a few years of the completion of construction. Some gas-based power projects have not been able to commence production due to non-supply of gas by the parties with whom they have tied up for the supply. The same is the case with some coal-based projects. These accounts have to be classified as NPAs ab initio as per the RBI norms.

Where a number of banks are involved, particularly under multiple banking arrangement, pari passu charge (where all will be entitled to the charge on equal footing in proportion to the amount of their advances) has to be created on the security offered by the company. Since it involves obtaining NOC (no objection certificate) from all participating banks and filing with Registrar of Companies (RoC), normally 3-6 months is given for the completion of formalities and creation of security. But when some of the participating banks smell some problems in the accounts, they refuse to concede pari passu charge with the result other banks are left with 3{+r}{+d}, 4{+t}{+h} or n{+t}{+h} charge rendering their loan accounts practically unsecured.

Restructuring of accounts either by the bank or under CDR arrangement is generally only a fallacy.

The account becomes stressed because the unit is not able to achieve their projections due to various factors cited earlier. The restructuring is done based on some facile projections prepared by a clever accounting firm without taking into account whether the basic factors which rendered the account stressed in the first place have changed for the better. Such accounts are bound to become NPAs sooner than later.

Wilful default

What has been discussed thus far are cases where the accounts have become stressed due to genuine business reasons. But there are cases of wilful default, diversion of funds, purchasing capital assets out of working capital funds, unplanned diversification without tying up the source of funds, building corporate offices and administrative buildings disproportionate to the requirements, promoters stealthily exiting the company by pledging or selling their shares, and so on.

The present guidelines on wilful default lack the teeth to effectively deal with such cases.

What is the remedy for this menace? Instant sops such as restructuring or tinkering with the interest rates have not served any purpose, and they will not in the future as well. A Government which is grappling with one scam after another can only indulge in crisis management and cannot offer any concrete solutions.

The need of the hour is the will to bring the economy back on track by taking concrete steps on all the aforementioned areas.

(The author is a former DGM of SBT and SBM.)

COMMENT NOW