Banks on a debt rejig spree to avoid accumulating bad loans

FC : R Srividhya: Apr 06 2012 , Chennai

Most CDRs take place in manufacturing, telecom, aviation sectors; private players too affected

Officials at public sector banks have been meeting corporate clients more often over the past two-three quarters than they used to do any other time in recent memory.

 With high interest rates and slower economic growth causing a strain on loan repayment for many corporate borrowers, the focus is on extending the tenure of repayment or providing a brief repayment holiday to clients to ensure that loans do not end up becoming non-performing assets (NPAs).

Public sector banks have been restructuring corporate loans to various sectors such as manufacturing, telecom and aviation in a big way to ensure that they do not end up landing in their bad loan books. 

State Bank of India has restructured loans to the tune of over Rs 3,000 crore till the third quarter of this financial year, while Punjab National Bank and Indian Bank have restructured loans of over Rs 6,000 crore.

“I would be lying if I say that there is no concern over asset quality. There is some stress on asset quality and some accounts have gone for corporate debt restructuring. The situation is not alarming though. 

We have restructured loans to the tune of Rs 400 crore in the fourth quarter alone,” said TM Bhasin, chairman of Indian Bank.

Usually nationalised banks perform loan restructuring in a big way since they are the ones who lend significantly to businesses.

Private banks largely lend to retail borrowers. Defying that belief, players like ICICI Bank went for restructuring of loans to the tune of Rs 1,300 crore in Q4 alone.

“Of the total number of loans restructured, usually about 20 per cent end up becoming NPAs. In many cases, restructuring helps genuine borrowers come out of bad times and repay the loans. 

There will be slippages, but it does not appear to be alarming at this point of time,” said Vaibhav Agarwal, a banking analyst at Angel Broking.

However, Indian Overseas Bank chairman M Narendra pegged the slippage levels of restructured loans even lower at 4-5 per cent.

“Restructuring does not mean the quality of asset is bad, but it could be because of a slowdown in cash flow, lower profitability or lower sales. In such cases, restructuring becomes essential. 

It only means that the repayment tenure is being extended. Out of 100 accounts that are restructured, only 4-5 tend to become NPAs,” Narendra claims.

Sectors such as power, aviation and telecom have been the biggest party poopers for banks in 2011-12 and a large part of the restructuring has happened in these sectors, bankers said.

“Exposure to the struggling sectors such as aviation and state power utilities may be restructured in 2012 together with growing exposure to infrastructure projects that face teething troubles. 

As a result, banks may see the share of loans restructured in 2011 and 2012 rise to 7-8 per cent of loans, significantly higher than 4.4 per cent seen in the aftermath of the 2008 crisis,” Fitch Ratings said in its outlook for the banking sector in 2012.

As credit offtake has not been significant over the past few months, banks had to exercise caution over existing assets and the focus naturally shifted to credit monitoring, reasoned a senior official at Punjab National Bank.

With the Q4 numbers of banks yet to be out, it remains to be seen if the restructuring efforts need to continue going forward and if slippages into NPAs has increased.

A lot would depend on what happens on April 17, when RBI would announce its annual monetary policy review for 2012-13 and possibly, a much-awaited interest rate cut.

Govt monitoring efforts to recover NPAs of banks

Mr D.K. Mittal, Additional Secretary, Ministry of Commerce and Industry, Govt of India.


BL :PTI: APRIL 4,2012

With bad loans of banks touching Rs 1.27 lakh crore during April-December 2011, the Government today said that it is monitoring the efforts for the recovery of non-performing assets (NPAs) by lenders.

“(We are) aggressively looking at efforts to recover NPAs,” the Financial Services Secretary, Mr D.K. Mittal, told reporters here.

High interest rates and lower economic growth has impacted the repayment capacities of borrowers, pushing up the NPAs of banks to Rs 1.27 lakh crore in the first nine months of 2011-12 fiscal.

Banks’ bad loans stood at Rs 94,084 crore in 2010-11, Rs 81,813 crore in 2009-10 and Rs 68,220 crore in 2008-09.

Mr Mittal further said that “some more capital” would be infused in the country’s largest public sector lender State Bank of India in the current fiscal.

Also, the Government “will ensure 11 per cent Tier I capital (equity) for SBI in the next two years’’, he added.

Currently, the Tier-I capital of SBI is around 9 per cent.

On March 30, the SBI executive committee had approved issuance of 3.65 crore equity shares at Rs 2,191.69 a piece through preferential allotment to the Government to raise about Rs 7,900 crore.

The Government has recapitalised public sector banks over a period to enable them to maintain Tier I CRAR (capital to risk assets ratio) at 8 per cent, and also to increase its holding in them to 58 per cent.

Rectify spike in NPAs: RBI orders banks

IE:Mumbai, Thu Mar 29 2012, 13:26 hrs


The Reserve Bank of India (RBI) asked banks to improve their ability to manage stressed assets, but said there was nothing alarming about an unexpected rise in the non-performing assets (NPA) levels this fiscal.

"Concerns (on NPA) are there. Banks have to improve their ability to manage NPAs. We have told banks what is their lacuna. They have to improve their information system. But we see that the situation is not alarming. Though this is our concern. Hope banks will be able to manage them," deputy governor KC Chakrabarty told reporters on the sidelines of a function organised by Yes Bank here.

It can be noted that following the continued slowdown in economic activities on the back of rising interest rate regime, banks, especially the state-run ones, have been reporting higher NPAs in their books since the second quarter.

The country's largest lender SBI had reported record gross NPAs in Q3 at Rs 40,080 crore and saw an 87.5 percent spike in its provisioning. But private lenders are better off.

The total NPAs in the system are set to top 3 per cent of the total assets this fiscal, against a 2.3 per cent last fiscal at Rs 98,000 crore.

But what's worrying the regulator is the an over 300 percent spike in corporate debt recast this fiscal, which has already touched Rs 76,251, against Rs 25054 crore in the previous fiscal. This makes the overall CDR asset in the system to over Rs 1.9 trillion.

There are many critical sectors that are looking for CDRs like the textile companies seeking a Rs 1 trillion worth of debts. And are the aviation industry. The RBI has approved Am Rs 18,000 crore for Air India, while Kingfisher's Rs 7,000 crore was already recast in 2010, and had even then became NPAs now.

The discoms are also in bad shape with their debts touching nearly Rs 80,000 crore while many have recently gone for CDRs.

The deputy governor also said the central bank is concerned about the banks selling insurance products through the bancassurance channel, but did not specify the reasons.

Since most of the banks have insurance subsidiaries, they promote selling their annuity and other insurance products through their own channels, which will enable them to have a captive customer base.

what it is ? Corporate debt restructuring

Livemint:Vivina Vishwanathan: Apr 3 2012. 9:44 PM IST


Debt restructuring happens when a company goes through financial distress and is unable to meet its loan repayment obligation to multiple institutions

Recently, companies such as Bharati Shipyard Ltd, GTL Ltd, Hindustan Construction Co. Ltd, Air India and Kingfisher Airlines have either sought approval from their company boards for corporate debt restructuring (CDR) or have already restructured their debt.

Why is it done?

Debt restructuring happens when a company goes through financial distress and is unable to meet its loan repayment obligation to multiple institutions. To avoid default on existing debt, the company uses debt restructuring.

What is corporate debt restructuring?

Companies take loans for their daily operations and capital expenditures. A bulk of this debt comes from banks and similar financial institutions—called the creditors. Sometimes promoters also lend to the company; this lending is in addition to the equity capital they already hold in the company.

In the event that a company’s cash flows are suffering, sometimes a lender or a creditor agrees to restructure a company’s outstanding financial obligations.

CDR is a mechanism evolved by Reserve Bank of India to help a company banking with multiple institutions under consortium arrangement. Through CDR, the multiple banks and financial institutions are given surety on repayment to a certain extent.

How is debt restructured?

This is usually done to reduce the debt burden on the company either by decreasing the interest rates it has to pay or by extending the repayment period of loans or both. It helps the company to increase its ability to meet the obligations.

In some cases, the debt may be exchanged for an equity position in the company. A debt moratorium is another option. Here, the company gets a relief for a certain period before starting the repayment of debt. For instance, Bharati Shipyard has secured a debt moratorium, so its new debt repayment schedule would begin only after 18 months.

What it means

A breather in repayment of loans is not only favourable for the company but also means that lenders will see lesser non-performing asset (NPAs). When an asset or loan stops generating regular cash flow, they are known as NPAs. CDR acts as a shock absorber for banks where, though delayed, the chances of part payment by the company increases which is better than no payment at all.

CDR helps a company clean debt from its balance sheet. Hence, if you are invested in a debt laden company, a debt restructuring will reflect well for its stock price as the financial health of the company may improve.

‘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.