• JUNE 25, 2013

Is loan restructuring panacea to banks' asset quality woes?

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.

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