Corporate Debt Restructuring :Restructured loans of banks may zoom by ₹1 lakh cr in next 5 months

B L :MUMBAI, NOV 4:2014

Debt of top 500 corporates totals ₹28 lakh cr; 1 in 5 firms distressed: India Ratings report

  

The Indian banking system could see restructured loans surging by ₹1 lakh crore in the remaining five months of this financial year even as it may take a ‘big bath’ to address asset quality problems and start the next fiscal year on a clean slate, said credit rating agency India Ratings (Ind-Ra).

Painting this grim scenario, the agency said loan accounts whose performance may deteriorate could be addressed (restructured) at one go.

Restructuring of assets entails creditors (among others) extending concessions to borrowers by reducing interest rates, rescheduling repayments and converting debt into equity, and promoters infusing equity into their venture.

Ind-Ra based its estimates of restructured assets on an analysis of the credit metrics of the top 500 corporate borrowers, who accounted for the largest debt in the financial year that ended in March 2014.

The aggregate debt of these 500 corporates is ₹28,76,000 crore, which is 73 per cent of the total bank lending to the industry, services and export sectors.

Financially distressed

Around 82 of these 500 top borrowers have already been formally tagged as financially distressed (as a non-performing asset, corporate debt restructuring case or restructured asset).

Another 83 (17 per cent) of these 500 borrowers, accounting for 9 per cent of the overall debt of the group, have severely stretched credit metrics, said Ind-Ra. The credit rating agency observed that within these 83 corporates, operating profitability barely covers the interest required to be serviced in most cases. These corporates have limited expectation of an immediate improvement in profitability.

However, thus far, these borrowers with severely weak credit metrics have not been publicly tagged as financially distressed. But one out of every four could be tagged as stressed by the end of March 2015.

Incremental restructuring

Ind-Ra assessed that potentially one-third to half of the 83 accounts could be in the category of SMA 2 (special mention accounts), with delays in debt servicing ranging between 61 and 90 days.

Loan accounts, which may be tagged as SMA 2 during the October-December 2014 period, would be either normalised or put up for restructuring. This decision is to be arrived by the lenders by March 31 next year, it added.

If some of the corporates are unable to generate significant cash flow or infuse significant equity in the near term, they may be identified by their lenders for restructuring pursuant to RBI guidelines.

Some borrowers may even deteriorate further, to be tagged as NPAs. The cumulative impact may be an incremental ₹60,000 crore to ₹1 lakh crore of restructured assets in the banking system in the next five months, the report said.

A senior public sector bank official said given the tough situation in the economy, whereby infrastructure projects are stalled because of external factors and de-allocation of coal blocks will impact metal, power and cement companies, the central bank needs to come up with a special dispensation for asset classification.

“If the RBI sticks to its deadline of April 1, 2015, for complete withdrawal of regulatory forbearance, then banks will get impacted as not only will an asset be downgraded once it is restructured, they will also have to make higher provisions. This will shake investor confidence in banks,” he said.

VS Seshagiri Rao, Joint MD and CFO, JSW Steel, said banks have to take a practical call and come out with a special sector-specific dispensation on stressed assets.

Each sector, such as infrastructure, power, steel and textiles, is affected by different problems, largely due to factors beyond the purview of company promoters.

For instance, delays in project clearance and high pricing of raw material in domestic markets, especially coal, is eroding profitability of Indian companies.

NPAs : Asset quality remains a niggling worry for Indian banks

Moneycontrol Bureau :Nov 05, 2014, 08.46 AM IST 

r.
Maintaining its cautious view, global rating agency Moody's recently said that it 



remains negative on Indian banks on the back of high leverage in the corporate 



sector.

Fears of worsening asset quality continue to haunt Indian banks. While poor asset quality is usually synonymous with public-sector lenders, private banks don’t seem to be out of the clutches of bad loans either. The list ranges from banks like State Bank of Bikaner and Jaipur  and State Bank of Travancore  to bluechip like ICICI Bank .

To begin with,  Indian Overseas Bank reported loss in the second quarter of the current fiscal year due to higher tax expenses and provisions for bad assets. The public sector lender made provisioning for bad loans to the tune of Rs 892.38 crore versus Rs 619.90 crore in the same quarter a year ago. Its asset quality worsened as gross non-performing assets (NPAs) jumped to 7.35 percent from 4.65 percent a year ago. Net NPAs also almost doubled to 5.17 percent from 2.83 percent a year ago.

The stock is likely to face heat as global rating agency Standard & Poor's has lowered the credit rating of IOB to BB+. The rating indicates speculative grade following IOB's asset quality deterioration. It expects the bank's asset quality to remain remain weak over the next 12 months.

While Union Bank of India ’s (UBI) net profit rose 78 percent in the quarter gone by, the picture on asset quality front didn’t seem too bright. Its gross non-performing assets (NPA) jumped 42 basis points quarter-on-quarter and 105 bps year-on-year to 4.69 percent. Net NPA climbed 25 bps Q-o-Q and 56 bps Y-o-Y to 2.71 percent in July-September quarter.

The subsidiaries of India’s largest public sector bank  State Bank of India (SBI) – State Bank of Bikaner and Jaipur (SBBJ) and State Bank of Travancore (SBT) also saw marginal rise in bad loans.

SBBJ’s gross NPA rose to 4.24 percent versus 3.6 percent and net NPAs was at 2.49 percent versus 2.1 percent, Q-o-Q. SBT was stung by higher NPA provisions. Its gross NPA increased to 5.11 percent from over 3.5 percent of the total advances, on a year-on-year basis. Net NPA also rose to 3.2 percent from 2.07 percent a year ago.

Their parent SBI is yet to announce it Q2FY15 earnings. In Q1FY15, the bank’s overall asset quality continued to be stable. Gross non-performing assets (NPA) slipped 5 basis points sequentially and 66 bps on yearly basis to 4.90 percent while net NPA fell 17 bps year-on-year (up 9 bps quarter-on-quarter) to 2.66 percent in Q1FY15.

Maintaining its cautious view, global rating agency Moody's recently said that it remains negative on Indian banks on the back of high leverage in the corporate sector.

" Our outlook for the country's banking system remains negative , as it has been since November 2011. The negative outlook reflects our view that high leverage in the corporate sector could prevent any meaningful recovery in asset quality, notwithstanding a moderate rebound in economic growth," the agency said in a note.

It further added that the negative outlook pertains mainly to the state-owned lenders which represent more than 70 percent of total banking system assets.

But largest private sector lender ICICI Bank is also not spared. The bank met expectations on profit and net interest income front (NIM) but asset quality weakened. Its gross NPA rose 4 basis points on a Y-o-Y basis and 7 bps sequentially to 3.12 percent and net NPA increased 11 bps on yearly basis and 9 bps quarter-on-quarter to 0.96 percent.

Banks face Rs 1 lakh cr loan restructure hurdle: Modi govt must privatise state lenders

Dinesh Unnikrinan : FP : Nov 5,2014

The rating downgrade effected by Standard and Poor’s on state-run lender, Indian Overseas Bank (IoB) is yet another strong warning to the Modi government about what is possibly in store in the ensuing years — worsening financial position and a bigger crises in government banks.

S&P downgraded the long-term credit rating of IoB to BB+ speculative grading in the face of recent deterioration in the bank's asset quality. IoB’s gross non-performing assets (NPAs) shot up to 7 percent in the September quarter from 5 percent in the March quarter.

Besides, the chunk of total standard restructured loans on the books of the bank too has surged to close to 8 percent in the quarter, which means a significant chunk of the assets in IoB’s is now under the stressed asset category.

According to officials at the agency, IDBI Bank is the only lender it rates that carry a BB+ rating.

Typically, long-term instruments of state-run banks are accorded rating at par with the sovereign rating given that these entities enjoy the backing of the sovereign. In rating parlance, BB+ is speculative or junk grade.

For practical reasons, a junk rating would mean a sharp rise in the borrowing costs of the firm concerned and risk aversion from the investors, besides being an indicator of trouble in the balance sheet. Kolkata-based United Bank of India, which had seen its gross NPAs surging to double digits early this year, is not covered by S&P.

At least five state-run banks have their gross bad loan levels above 5 percent of their total loans now. Some of them are facing immense stress on account of an equal rise in the restructured loan portfolios as well. Restructured loans are loans of troubled borrowers, which seek relaxed repayment terms from banks.

Currently, about Rs 2.5 trillion of the loans given by banks are bad and about Rs 5-6 trillion are being recast under various channels.

The situation is unlikely to get better any time soon. On Tuesday, rating agency, India Ratings, formerly known as Fitch India, said India's banking system is likely to witness a surge in restructured assets by a whopping Rs 60,000 to Rs 1,00,000 crore over the next five months.

"We expect the restructured assets in the banking system to shoot up by another Rs 60,000 crore to Rs 1 trillion over the next five months," India Ratings senior finance director Deep N Mukherjee said.

Such a rise in the bad and restructured loans could significantly add up to the capital burden of banks since current norms require banks to set aside substantial amount of money to cover stressed assets.

Capital burden arising out of bad loans is just one side of the story. State-run banks also require about Rs 2.5 trillion capital to meet the Basel-III capital norms.

Any respite in the stressed asset situation can happen with a lag—that too if economic revival takes strong hold, projects come back on track as and when investments return to the country and procedural roadblocks are removed. Until then, stress in the banking system is a hard reality before the Modi-government to deal with.

The financial burden will ultimately fall upon the government, which is the owner of state-run banks. The government infuses capital into state-run banks on an annual basis.

For the current fiscal, the budgeted allocation is Rs 11,200 crore. That would be just a fraction of what is actually required considering the growing capital requirement, even with a longer deadline to comply with Basel-III rules.

Going ahead, a capital constrained government will find it extremely difficult to continuously feed state-run banks with taxpayer’s money. The solution, as FirstBiz has highlighted before, is in privatizing public-sector banks and leaving the competition to the market. The government has no business to be in business.

Modi, who has positioned himself as the agent of change, shouldn’t shy away from uttering the P-word any more. The process could begin with small and medium sized banks that are financially weak.

 

Corporate Debt Restructuring :Banks step up restructuring of stressed assets

 Anup Roy |  Vishwanath Nair mint  27 Oct 2014

Fourteen cases worth Rs.13,300 cr were referred to
corporate debt restructuring cell in the September 
quarter against two cases worth Rs.2,854 cr in Q1

Mumbai: Indian banks have only two quarters left to restructure stressed assets without significantly dragging down their profits—a fact that’s prompting banks to step up the recast of loans that may eventually need restructuring.

Effective 1 April 2015, the Reserve Bank of India’s regulatory forbearance, under which banks were allowed to qualify restructured assets as standard, will come to an end.

For now banks are setting aside 5% of the value of the loan to cover the risk of default on any restructured assets. Starting in the next financial year, when all restructured assets will be termed as non performing assets (NPAs), or bad loans, the requirement will increase to a minimum 15%.

The change will also mean banks’ bad-loan portfolio will swell.

In fact, fearing an increase in bad assets once change takes effect, bankers have already started asking RBI to extend the forbearance for another year, the Business Standard reported on 15 October. The bankers, according to the report, have told RBI that if the window is not extended, their gross NPA ratio will rise to 10% from 4% in March 2014.

Bad loans in the banking system rose to 4.03% of total advances in 2013-14 from 3.42% in 2012-13 and 2.94% in 2011-12, finance minister Arun Jaitleytold the Parliament on 1 August, as slower economic growth and delays in securing statutory approvals such as environmental clearances and completing land acquisition stalled many big-ticket projects, hurting companies’ ability to generate cash flows and repay loans on time. The economy grew less than 5% in each of the previous two years.

To fend off some of the negative impact of higher NPAs and increased provisioning that will be required from next year, banks appear to be hastening restructuring.

“Restructuring is not a bad thing. The economy is not out of the woods and a lot of companies are under stress,” said a senior public sector banker who didn’t want to be named.

Restructuring through so-called joint lenders’ forum or the corporate debt restructuring (CDR) mechanisms will “continue to happen, but we won’t get the regulatory leeway if we restructure after six months”, the banker said.

“So for a few cases, where we know for sure restructuring will be required in the coming quarters, we are fast-tracking the process to save precious capital. There is nothing wrong in it,” he added.

This increased pace of restructuring is showing up in data from the CDR cell. In the three months ended 30 June, referrals to the CDR cell fell to only two cases, amounting to Rs.2,854 crore, according to data on the CDR cell website.

In the three months ended 30 September, 14 cases, totalling Rs.13,300 crore, were referred to the cell. Of the referrals, seven cases involving a combinedRs.6,000 crore of loans came in September alone. Among these was Shriram EPC Ltd’s Rs.2,400 crore loan. On 11 September, Shriram EPC informed the BSE that its board had approved a scheme of restructuring.

To be sure, the fall in debt restructuring cases in the first quarter was also partly due to a new stressed asset framework under which banks were required to form a JLF to monitor accounts of Rs.100 crore and above that are overdue by more than 60 days.

The JLF can together choose to give additional funds to a stressed borrower, or restructure, or initiate recovery if they feel their loan is under threat.

The new rules were effective 1 April.

“It took a full quarter for banks to understand how the JLF should function. Companies also requested us not to put them in CDR because that puts lot of restriction on them, hence the low referrals in the first quarter,” said another senior public sector banker who did not want to be named.

Once a company is in CDR, its operating freedom is curtailed as banks keep a close eye on the activities of the management and sometimes push the companies to sell assets to recover their dues. The companies also find it difficult to raise additional funds from the market.

“Besides, companies were hoping that with a stable government at the centre, the macro-economic situation will improve fast, but nothing much came in the July budget and then the recent coal de-allocation has dashed hopes of companies for a quick turnaround. Referrals in the second quarter is now back to normal,” said the banker quoted above.

However, bankers add that restructuring in the current fiscal is unlikely to rise above the levels seen in previous years. Rating agency Crisil Ltd estimates that restructuring in fiscal years 2012, 2013 and 2014 were to the tune ofRs.1.2 trillion, Rs.1.6 trillion and Rs.1.3 trillion, respectively.

Crisil expects the banking system to restructure Rs.1 trillion of loans in fiscal 2015, out of which Rs.30,000 crore was completed in the first quarter.

“The key reason is the existing pipeline of assets under restructuring, end of regulatory forbearance for restructured assets by March 2015, and continued pressure on the credit profile of leveraged companies. This will take the cumulative restructuring since April 2011 to nearly Rs.5 lakh crore by March 2015,” said Pawan Agrawal, senior director at Crisil Ratings.

Restructuring in fiscal 2016, the year when the regulatory forbearance ends, depends on a few key factors, explained Agrawal.

Apart from economic growth and the ability of firms to raise equity through sale of assets or otherwise, “success of the RBI norms related to revitalization of distressed assets, the effectiveness of JLFs and success of the policy measures (such as fuel availability, fuel pricing, and ease of land acquisition process) to address the viability of the infrastructure projects”, will be key in determining restructuring in the next financial year, he said.

An emerging uncertainty which could add to the need for restructuring is the recent de-allocation of coal blocks following a Supreme Court order.

Bankers fear this will add to stress across power sector borrrowers, many of whom have already faced adverse operating circumstances due to issues such as inadequate fuel linkages. Loans to companies affected by the coal-block de-allocation may need restructuring, bankers say.

In a high-level meeting on 17 October between the finance ministry, power ministry, and bankers, power companies requested for special dispensation for their loans. The request is likely to be put across by bankers to RBI.

A special dispensation is restructuring outside the regular banking mechanisms such as CDR where accounts across an industry can be restructured without additional provision requirements. Typically, under such schemes, companies get a temporary moratorium and more time to repay loans and a change in interest rate terms.

“These are special extraordinary conditions and merit a dispensation by the central bank. If RBI allows us such a provision, then the stress on our books can come down significantly,” said a banker who attended the 17 October meeting. He also spoke on condition of anonymity.

Banks’ exposure to the power sector is more than Rs.5 trillion, banking secretary G.S. Sandhu said after the meeting. An 8 October report by India Ratings and Research Pvt. Ltd said the committed exposure of the banking sector to power projects affected by the Supreme Court verdict is aroundRs.90,000 crore, or about 1.2% of the banking system’s loans.