Is loan restructuring panacea to banks' asset quality woes? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  
  • Home
  • Outlook Arena
  • Jun 25, 2013 - Is loan restructuring panacea to banks' asset quality woes?

Is loan restructuring panacea to banks' asset quality woes?

Jun 25, 2013

The banking sector in India is not yet out of woods. Moderating non-performing loans in the quarter gone by and the cheap valuations of many banks is simply a mirage. On a closer look, the asset quality woes are still not behind for Indian banking system. And the cheap valuations of few banks are only alluring.

Asset quality pressures for the Indian banks are expected to stay even in the current fiscal. While the pace of deterioration may decline on account of slew of proactive steps from the government agencies, the restructured assets since past 18 months have only been on the rise. And we cannot dismiss this as a case of oversight; for increased restructuring and lower incremental non-performing loans only imply postponement of today's problem to tomorrow.

The increased corporate debt restructuring CDR) cases in recent periods have been a case in point. Interestingly, the CDR cell, or the cell that has been set up by the banks to analyze companies with high debt and provide them relief through lenient interest and repayment terms, is in itself proving worrisome for banks. If we were to go by facts, according to the CDR cell data, the total restructured loans worth Rs 2.2 trillion of 401 companies were reported as on March 31, 2013. What came as a shock is that this amount stood double than the one in FY12 and is only set to increase further this year as more and more corporates are desperate to seek solace under the CDR mechanism. CDR mechanism has been repeatedly misused by large corporates with strong political links to get temporary reliefs on their loan commitments. The Kingfisher debacle, for instance, came as a huge blow to behemoth State Bank of India (SBI) which had the maximum exposure to the beleaguered airline. This was just the beginning. Deccan Chronicle, Winsome Diamonds, Electrosteel, Suzlon and many more corporates were amongst the big ticket defaulters. State Electricity Boards of several states also featured on the list. But are these corporates only to be blamed? Banks too have been equally guilty of managing to under report slippage of loan quality in their balance sheets. More so, it is unbelievable that when the economy itself is in doldrums and the growth lopsided, how there can be slowdown in bad loans. After all, these bad loans are nothing but the manifestations of the weak macroeconomic conditions confronting the nation. Moreover, it's not merely the problem of bad loans accretion, but the restructuring menace.

What has actually triggered the problem of spectacular rise in restructured assets?

The answer is simple. Large corporates borrowed heavily between the periods of 2006 and 2010 to bid for infrastructure projects and for expensive acquisitions. Later, due to many reasons we are aware of, these corporates failed to honor their stipulated interest commitments and subsequently repayments became increasingly difficult. At this juncture, they turned to banks for help.

Although, banks then came to the rescue of these top companies and as we know had their fingers burnt, going ahead this may not be the case. In this backdrop, the Reserve Bank of India (RBI) has revised the restructuring norms making the going tough for the lenders and the corporates. The RBI has increased provisioning for the recast loans massively and also made loan recasts tougher by increasing promoters' contribution. Moreover, the Finance Ministry also commanded stringent evaluation of restructured cases to be sent to CDR cell and ensuring adequate collateral. While higher provisioning would imply lower profitability for banks; higher promoter contribution and heavy collateral would add to the anxiety of the corporates too.

Well, it is high time that the industry wakes up to realize that restructuring is not the panacea to the asset quality issues of lenders and the cash stripped borrowers. It is a temporary phenomenon. While the regulator is already sanguine about the same, it's time for the industry to take a call.

Do valuations factor in the risk?

As for the investors, the choice of good banking stocks has got tougher. Attractive valuations do not price in these risks and they should be cognizant enough to cherry pick quality stocks.

Shweta Daptardar-Mane

Shweta Daptardar-Mane, has an MBA (Finance) degree and over five years of equity research experience. She passionately tracks the Banking and Finance industry and follows the macro developments in the economy, particularly the central bank monetary policy. She is deeply inspired by not only Buffett's investment acumen, but also by his infectiously charismatic, down-to-earth persona. Shweta is the contributor to our large cap franchise, StockSelect.

Equitymaster requests your view! Post a comment on "Is loan restructuring panacea to banks' asset quality woes?". Click here!

1 Responses to "Is loan restructuring panacea to banks' asset quality woes?"

chandra shekhar

Sep 10, 2013

a very brief and to the point analysis.i found it enlightening.very very useful.pl keep it up

Like (1)
  
Equitymaster requests your view! Post a comment on "Is loan restructuring panacea to banks' asset quality woes?". Click here!

More Views on News

5 Indian Banks with the Lowest NPAs. Here's How they Did It... (Views On News)

Sep 27, 2021

These banks have managed to maintain their asset quality even in the middle of a pandemic.

PNB Reports an Over Three-Fold Jump in Net Profit as Provisions Fall (Views On News)

Aug 3, 2021

The reduction in provisions for bad loans and asset quality stability may have aided the lender's earnings.

Here's Why IndusInd Bank's Net Profit Doubled in the June Quarter (Views On News)

Jul 28, 2021

All you need to know about the latest quarterly results of IndusInd Bank.

Axis Bank's Stock Falls as Results Disappoint on Asset Quality (Views On News)

Jul 27, 2021

Axis Bank's net profit more than doubles on a spike in other income and lower provisioning.

ICICI Bank's Quarterly Results Sends Stock to 52-Week High (Views On News)

Jul 26, 2021

ICICI Bank expects to maintain margins at the same level in coming quarter.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE BANKEX


Nov 30, 2021 (Close)

S&P BSE BANKEX 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS