‘Defaults by Indian firms rise on tight cash, falling demand’

ENS Economic Bureau : Mumbai, Wed Apr 04 2012, 00:38 hrs


The double whammy of falling demand and tight liquidity over the last year has increased credit quality pressures for India’s corporates.

The annual default rate for 5,500 Crisil-rated companies hit a 10-year high of 3.4 per cent in 2011-12, the rating agency said in a research report. In total, 188 companies rated by Crisil defaulted in 2011-12 as against 105 in 2010-11.

In percentage terms, 2010-11 witnessed defaults at 3.1 per cent of the companies under coverage, while in 2009-10 that number was 2.7 per cent and in 2008-09 it was 0.75 per cent.

As a consequence, the gross non-performing assets (NPAs) for banks have gone up and the proportion of restructured debt has shot up to 3.3 per cent in the period between March-December 2011.

Portfolios rated AA and AAA, however, have performed better as there were no instances of default by any company in these categories. One AAA-rated company and 12 having the AA rating were downgraded.

“Weak liquidity caused by elongation of working capital cycles is the primary reason for the defaults. This trend is likely to persist with slowing demand,” said Roopa Kudva, MD and CEO, Crisil. A fourth of the defaults were accounted for by three sectors: textiles, steel and construction and engineering.

According to the report, textile exports have been hampered by weak demand in both the US and the euro zone countries, while the steel sector has been impacted by higher input prices. Construction and engineering have been hit by low investment demand, stretched working capital cycles and high interest rates. The report said that the spectre of defaults may continue if demand situation does not improve.

“However, high operating rates, softening in commodity prices and flexibility to defer capital expenditure will help players offset profitability pressures, and tackle slackening in demand,” said Ramraj Pai, president, Crisil Ratings.

188 Cos rated by Crisil default in FY’12

Annual default rate for 5,500 Crisil-rated companies hit a 10-year high of 3.4 per cent in 2011-12

2010-11 witnessed defaults at 3.1 per cent of the companies under coverage, while in 2009-10 that number was 2.7 per cent

Portfolios rated AA and AAA, however, have performed better as there were no instances of default

Corporate defaults hit a 10-year high

 

Published: Wednesday, Apr 4, 2012, 9:00 IST  By Rajiv Ranjan Singh:Mumbai : DNA Corporate credit defaults surged to the highest in a decade last fiscal, at 188 cases, with textiles, steel and construction & engineering sectors accounting for a quarter, rating agency Crisil said on Tuesday. Credit quality pressures accentuated in the second half of last fiscal as corporate profitability remained subdued and liquidity pressures emerged, it said. Indeed, as many as 107 of the defaults came in the second half of the fiscal, which saw 292 downgrades by Crisil as against 266 upgrades. A surge in rated entities in the lower rating categories, which have been more susceptible to defaults, also contributed to the rise in the default rates, Crisil noted in a report. According to it, the downgrade in textiles was due to slowdown in the euro zone, while the construction sector witnessed liquidity crunch and weak demand on the domestic front. As for steel, the sector faced higher input costs and sluggish demand on both domestic and international fronts. The power sector too faced headwinds, said Agrawal, but added that though there were a few restructurings on the generation side, the liquidity pressure was greater on entities manufacturing transformers and other equipment used in power generation. Around a third of the downgrades by Crisil Ratings were in the default category. The rate of default, at 3.4% for the fiscal, is likely to remain high going forward, Crisil noted. It expects banks’ cumulative NPAs to be 3.1-3.3% this fiscal, and growth in advances to remain around 17.0%. “Weak liquidity caused by elongation of working capital cycles is the primary reason for the defaults,” said Roopa Kudva, MD & CEO, Crisil. “This trend is likely to persist with slowing demand,” she said. In fact, rising non-performing assets (NPAs) and increase in the quantum of debt restructurings, could dent the banking industry’s profitability and return on assets this fiscal, said the report. Between March 31 and December 31, 2011, banks saw gross NPAs rise to 2.9% of advances from 2.3% even as the quantum of debt restructured moved up to 3.3% of advances from 2.5%. This could force banks to set aside a higher amount of provisions against NPAs, hitting their profitability and capital levels, said Pawan Agrawal, director, Crisil Ratings. “Restructuring will require some losses to be taken, either on principal or interest, which will lead to lower profits for banks. Impact on each bank will depend on the level of provisioning, profitability, exposure to stressed sectors, etc, but it is clear that the banking sector will remain under pressure assuming interest rates remain unchanged,” said Agrawal. But these negative factors may be compensated to an extent as interest rates and commodity prices decline, he said. A rate cut could increase banks’ treasury incomes. “There is also potential likelihood of commodity prices declining, which will help companies maintain their margins,” said Somasekhar Vemuri, head, Crisil Ratings. “Profitability (of Indian companies) which were under severe pressures, we believe that the pressures may not intensify as there is an expectation of decline in interest rates during the year,” he said. The saving grace could be the telecom companies, which are witnessing asset growth and improvement in financial health, said Crisil, adding that sectors benefitting from high commodity prices will also see growth. Services are also expected to do reasonably well. The sector, which logged a 9% growth last fiscal, is expected to grow 8.7% this fiscal

Visible pressure on banks' loan quality, says Crisil

BL :MUMBAI, APRIL 3,2012

Yet, rating agency maintains stable outlook on Indian banks

The asset quality of Indian banks will remain under pressure, according to credit rating agency CRISIL.

The agency expects banks' Gross Non Performing Assets (NPAs) to rise to around 3 per cent by March-end 2012 and 3.2 per cent by March-end 2013.

Banks' gross NPAs increased from 2.3 per cent of advances to 2.9 per cent between March 31 and December 31, 2011.

Specifically, the pressures on asset quality are visible in the steadily rising trend in the gross NPAs of public sector banks (PSBs), said CRISIL in its credit quality outlook for the near to medium term.

The agency said the high slippages in the last few quarters have been largely on account of high interest rates, rise in delinquencies in the agriculture and small and medium enterprises segments, and the migration to system-based NPA recognition. The stress on banks' corporate portfolios is also reflected in the increasing incidence of restructuring of relatively large exposures in sectors such as power and aviation, said the agency.

STABLE OUTLOOK

Crisil expects such trends (build-up in stress and more restructuring) to continue through a large part of 2012-13, with persisting concerns on growth, policy issues and high interest rates.

According to Mr Somasekhar Vemuri, Director, CRISIL Ratings, about 15-20 per cent of the assets restructured after the 2008-09 global economic crisis have become non-performing for banks.

Despite continued asset quality pressures, the agency has maintained a stable outlook on rated Indian banks.

This is due to the availability of strong support from the government for the PSBs, their adequate capital position, and stable resource profiles. The agency expects retail non-banking finance companies to maintain healthy growth in business volumes in 2012-13.

NBFCS

However, the strong growth witnessed in 2011-12 is likely to moderate in 2012-13.

Newer asset classes, increasing penetration in semi-urban and rural areas, and substitution of the unorganised sector continue to drive growth for the retail NBFC sector.

The asset quality and profitability levels of NBFCs may be subject to some pressure, given the weakness in the economy and high interest rates.

For capital market players, CRISIL expects the operating environment to remain challenging with severe pressures on the equity broking and investment banking businesses.

It observes that many of these players have been gradually diversifying into retail finance to address these challenges.

Record number of cos in ‘lenders ICU’

FE :GEORGE MATHEW:3 April 2012

 

Mumbai: Stuck in a financial quagmire, an increasing number companies is seeking loan bailouts from banks and institutions. With high interest rates, waning business confidence and subdued macroeconomic environment playing havoc, a record number of 389 companies with loans amounting to Rs 2,05,692 crore had approached the corporate debt restructuring (CDR) cell of the banks and financial institutions (FIs) during the fiscal ended March 2012, which is a 45.71 per cent jump from Rs 1,41,158 crore in the same period of last fiscal.

The CDR cell of banks and FIs are yet to finalise the debt recast requests of 47 companies involving an amount of Rs 35,878 crore. “We had rejected the recast requests of 56 companies involving an amount of Rs 19,589 crore. Normally we reject the requests of companies which are beyond recovery or where fund diversion or fraud is suspected,” a senior official of the CDR cell of banks told The Indian Express

. As of now, the cell has approved the recast requests of 286 firms for loans of Rs 1,50,225 crore (Rs 1,10,914 crore last year). Normally, banks and FIs refer a company to the CDR when the borrower finds it difficult to repay the principal and interest within the stipulated period of 90 days and the borrower has a genuine difficulty in making the repayment.

“Of late we are seeing a rise in companies coming to the lenders’ ICU from sectors liked power, steel, sugar, textiles and infrastructure. This is worrisome,” the official in the CDR cell said. Steel and infrastructure together accounted for nearly 38 per cent of the cases — involving Rs 55,000 crore — referred to the CDR cell. There are nine telecom borrowers with an overdue amount of Rs 9,199 crore.

The CDR cell received some high profile CDR requests from India Inc recently. HCC owned by Ajit Gulabchand is now in the CDR cell with loans involving Rs 8,300 crore. Bharati Shipyard has also come to loan restructuring with a loan of over Rs 5,600 crore. Hotel Leela has sought loan recast for over Rs 3,000 crore loan. The biggest loan recast this year is from the GTL Group for over Rs 17,000 crore. The only aviation account that has come for recast is Deccan 360 with a loan of around Rs 500 crore. “Kingfisher has not come to the CDR approval table as of now,” he said.

The CDR scheme covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs10 crore and above. The CDR is approved when 75 per cent creditors by value and 60 per cent by number approves the recast request. Their decision will be binding on the remaining 25 per cent by value and 40 per cent by number. Once approved, the borrower can get sops like cut in interest rates and extension in repayment period.

New Union Bank chief to focus on NPAs, retail biz

BS Reporter / Mumbai Apr 03, 2012, 00:15 IST





With economic slowdown pushing up the tally of bad loans, Union Bank of India will focus on improving the management of non-performing assets (NPAs) and bolster its financial profile, said the new chairman and managing director, D Sarkar.


The emphasis will be on monitoring NPAs, including recoveries. The bank will have to study the sharp rise in NPAs due to system-based recognition of bad loans, he said on Monday.


Moody’s had downgraded the ratings of Union Bank in March due to weak asset quality and inadequate loss absorption capacity. The bank’s financial strength was cut from “D+” to “D”. The global local currency deposit is down to Baa3/Prime-3 from Baa2/Prime-2.


M V Nair, the former CMD, had told Business Standard in March that gross NPAs declined in December 2011 to 3.33 per cent after peak of 3.49 per cent in September 2011. It is expected to fall below 3 per cent for the quarter ended March 2012. The asset quality is expected to deteriorate further against the backdrop of a slowing economy and high interest rates, Moody’s had said.


Referring to the room to increase retail business, Sarkar said the bank has good network of branches and sound technology platform, which can be used to increase retail business, which is low now.


The share of outstanding retail loans at Rs 15,005 crore was about 9.61 per cent in loan book at the end of December 2011.


The share of low-cost deposits — savings and current account — at around 32 per cent of deposits is comparable with peers. The emphasis is to keep the cost of funds low, he added.


The coverage ratio for non-performing assets increased in December 2011 to 63.14 per cent (70.2 per cent in year ago) from 60.52 per cent in September 2011. It is expected to rise hereafter to touch 66 per cent by March end.

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I learned that there are no free lunches. 


And I learned the value of hard work."

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 Lee Iacocca was instrumental in the success of two automobile giants: Ford and Chrysler.

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Pending DRT cases spike by 70% in 2011 to Rs. 1.57 trn amid slowdown, inefficiency

Live Mint : Kian Ganz & Remya Nair (Mint)  | Wednesday,


 28 March 2012 12:32

The number of pending cases at India’s debt recovery tribunals (DRT) has increased by almost 70% in about a year, with the economic slowdown affecting the repaying capacity of borrowers and thus worsening the asset quality of banks.

Also, slow clearances of cases in the tribunals is adding to the pendency, say lawyers and analysts.

In response to a question in the Lok Sabha on 23 March, the finance ministry said 63,669 cases were pending in the tribunals as of 31 January. On 31 December 2010, 37,616 cases were pending, according to a Right to Information (RTI) request filed by Prashant Reddy, an intellectual property (IP) lawyer who also blogs on industry blog Spicy IP.

There are 33 DRTs in India, with three each in Chennai, Delhi, Kolkata and Mumbai—the last three having the maximum number of pending cases. The amount locked in as a result was Rs1.57 trillion as on 31 January, against Rs1.13 trillion as on 31 December 2010.

DRTs are semi-judicial authorities that help banks by speeding up the recovery process through steps such as issuance of attachment orders.

An official with the Indian Banks’ Association, who did not want to be identified, cited two reasons for the sharp increase in the number of pending cases at the debt tribunals.

“First is that more banks are approaching the DRTs to recover their bad debts,” this official said. “The second reason is that borrowers are also going to DRTs to challenge actions taken by banks under the Sarfaesi Act.”

The Sarfaesi Act, or Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, allows banks to auction properties of borrowers who fail to repay their loans, or recover their loans through securitization and asset reconstruction.

Of the 63,669 pending cases, 37,654 have been pending for more than a year. The finance ministry said a committee headed by a chairperson of the debt recovery appellate tribunal is examining the “legal, structural, administrative, monitoring and supervisory systems” of DRTs and will recommend measures to make these tribunals more effective and efficient.

“It is often challenging for DRTs to get all the interested parties together at one time. Hence, it becomes a long-drawn process. Banks facing large downside risks (dilution of market value of loan assets) try to settle NPAs (non-performing assets or bad loans) through one-time settlements or corporate debt restructuring,” said Robin Roy, associate director (financial services), at PricewaterhouseCoopers Pvt. Ltd. “Banks do a cost-benefit analysis before taking cases to DRTs as there could be substantial costs attached (long waiting periods) to going to DRTs.”

Banks have three legal options for resolving NPAs—the Sarfaesi Act, DRTs, and Lok Adalats, which are non formal alternative court, he said, adding that while loans above Rs10 lakh go to DRTs there is no sector-specific condition for approaching the tribunals.

Dushyant Kumar Mahant, a lawyer who has represented borrowers in the DRTs several times, said the case load has risen dramatically particularly because of the steep increase in property prices, which has resulted in many borrowers taking loans that they end up not being able to service.

The low disposal rate at the DRTs was caused by infrastructure problems, inadequate staffing also at senior levels, and non-cooperation by borrowers’ lawyers, said Navneet Gupta, Delhi-based partner at law firm SNG & Partners and who often represents banks.

Another lawyer who did not want to be identified blamed the bodies overseeing the DRTs and other tribunals. “The main problem is the appointments. It takes them 6 or 7 months to appoint the presiding officer and then the presiding officer has only a term of five years under the recovery of bad debt Act (Recovery of Debt due to Banks and Financial Institutions Act, 1993,) and they will start looking for a new guy after the old guy retires,” this lawyer said.

“It’s very lacklustre,” said one DRT lawyer about the presiding officers at many DRTs. “You go over there and even if (you) ask to present an argument over there, the matter is adjourned for one reason or another—(the officers) don’t have the bent of mind for disposal rate. It is very difficult for pendency to go down (this way).”