No revival in sight: More companies fail to regain financial health despite loan recasts

A right-wing government at the Centre might have helped India Inc put to rest their concerns of a prolonged policy paralysis that gripped the country during the UPA-regime and spur optimism in the markets that good days are ahead, but the sentiment is yet to manifest on corporate profitability.

The number of stressed companies that were taken out of the corporate debt restructuring (CDR) mechanism because of financial failure remained high during April-June, while no single company managed to exit due to improvement in their financial position, according to an analysis of the latest data released by CDR cell.

For the quarter ended 30 June, nine companies with total loans to the tune of Rs 8,706 crore were taken out of the CDR system due to failure, while no company withdrew successfully. As against this, in the March quarter, only five companies exited due to failure with their total loans amounting to Rs 942 crore, while six companies exited successfully with a combined loan amount of Rs 5,580 crore.

CDR is a forum of banks, which offer relaxed loan repayment terms to a stressed borrower firm typically by offering elongated repayment period, reducing the lending rate, offering a repayment holiday (moratorium) and, in some cases, taking a haircut (sacrifice), if necessary.

A company is typically taken out of CDR in two scenarios: one, if it manages to improve its finances post the loan recast; and second, if the firm fails to regain financial health despite the recast facility. Banks restructure loans under CDR only when 60 percent of the lenders in terms of number and 75 percent in terms of value approve the plan.

Bankers said the government’s efforts to revive business sentiments will take time to show results on corporate profitability.

“We do expect some amount of loan recasts to continue in the months ahead since the stress of economic slowdown still persists. Any revival will take time,” the chairman of a Kolkata-based state-run bank told FirstBiz.

Last week, announcing the June quarter earnings, State Bank of India chairman Arundhati Battacharya had said the pressure of bad loans have subsided but the lender is yet to see companies coming with new projects.

Total amount of loans, which has been approved by CDR banks stood at Rs 3.5 lakh crore as of end-June, on a cumulative basis, according to the data. Out of this, Rs 2.5 lakh crore loans are currently being restructured. Besides CDR, banks also do bilateral loan recasts.

Though there is no aggregate number available for bilateral loan recasts, bankers and financial services experts estimate this figure close to the CDR pile, which makes the total amount of restructured loans in the banking system about Rs 6 lakh crore.

This, if added to the bad loans in the banking system (about Rs 2.5 lakh crore), takes the total chunk of stressed assets in the banking system to about Rs 8.5 lakh crore, or 14 percent of the total loans given by banks as on 25 July.

Ever since Narendra Modi assumed power at the Centre in May, the government has begun efforts to unclog the system by fast-tracking clearance process for delayed projects and by encouraging more investments in the fund-starved infrastructure sector, the biggest contributor to loan recast pile.

As part of this, the government has sought a list of project proposals stuck with banks for various clearance delays, to seek ways to resolve the problems.

Analysts expect a quarter of the total restructured loans to turn bad in the absence of economic revival. Of the total loans that are being restructured under CDR until June, infrastructure loans constitute about 23 percent of total loans or about Rs 57,906 crore, followed by the iron and steel sector, which constitute 16 percent or Rs 40,783 crore. Textile and power sectors too topped the list, together contributing a combined Rs 41,000 crore to the restructured loan pile.

For banks, rising chunk of bad and restructured loans on their books means adverse impact on their profitability. This is because banks need to set aside money to cover such loans. Under norms, banks need to set aside 5 percent of the loan amount as provisions on every fresh loans they restructure. This means if a Rs 100 loan is recast, Rs 5 needs to be set aside as provisions.

But most banks typically prefer to recast their loans, because else they run the risk of this loans slipping to bad loans. If a loan turns bad, the provision amount shoots further high, up anywhere between 20 percent and 100 percent of the loan amount, depending upon the nature of the bad asset.

For the quarter ended June, most state-run banks reported a modest rise in their net revenue on account of high provisions made on bad loans. To be sure, the pace of bad loan accretion, however, slowed giving early signals of a gradual reversal in the asset quality scenario.

According to a_FirstBiz_ analysis , total gross non-performing assets (NPAs) of 37 commercial banks, which announced June quarter earnings, stood at Rs 2.45 lakh crore, up 19 percent, compared with Rs 2.06 lakh crore in the year-ago quarter.

In the March quarter, the gross NPAs of these banks had stood at Rs 2.37 lakh crore.