Slowdown leads to greater CDR, rise in banks' stressed assets

Companies and banks are showing an increasing propensity of going in for restructuring of loans as the economy slows down and corporate health starts to take a beating. However, this growing trend is now causing serious stress on the banking system as a whole, with an increase in the percentage of overall stressed loans.

A recent Reuters report also pointed to the possibility of the Leela Group getting the benefit of a similar restructuring on their loan terms with the banks willing to amend the loan terms rather than declaring it in default.

Several other cases have also seen banks restructuring corporate debt to enable the account to stay afloat. This, analysts now warn, will cause a serious dent to banks’ asset quality in the days ahead as the slowdown begins hitting companies hard.

[caption id=“attachment_354141” align=“alignleft” width=“380” caption=“The banks had told RBI at the time that while asset quality continued to be a concern for banks, some had been trying to focus on smaller accounts to improve quality of assets. Reuters”] [/caption]

Says Ashok Wadhwa, chairman of the Ambit Group: “Banks are seriously constrained as growth for the banking sector is also challenged. It’s our belief that almost 10 percent of the loans given by the banking sector aren’t servicing themselves at this point of time.”

Wadhwa says the banks will now have to start looking at suspect cases and start putting pressure on recalling money. This, in turn, could lead to some promoters deciding to sell part or entire stakes in their businesses as pressure from banks mounts.

A recent report on banks’ stressed loans, put out by financial services firm Motilal Oswal, says that large corporate restructuring is leading to higher stress on the banks. The report says that barring State Bank of India (SBI), most of the other large state-owned banks are seeing an increase in their net stress loans, which have risen by around 75-140 basis points.

Overall net stressed loans - defined as net non-performing assets plus outstanding standard restructured loans - for Motilal Oswal’s universe of state-run banks increased to 7.3 percent versus 5.1 percent in FY11. This is, however, lower at 5.9 percent if you exclude Air India and the State Electricity Boards (SEBs).

Excluding SBI, NSLs for state-run banks are up 323 bps to 8.13 percent, the report points out, adding that Air India and SEBs have contributed to the bulk of the increase in restructured loans. In fact, these two, together, account for 195 bps of the 323 bps increase, the report adds.

SBI has managed to keep NSLs low at 5.5 percent and is the only large state-run bank where NSL has remained flat year on year. Significantly, excluding the Air India and SEB cases, large state-run banks have, in fact, shown a lower increase in NSL than the mid-cap state-run banks, which have reported a rise of 100-250 basis points in NSLs.

As reported earlier in Firstpost, Reserve Bank of India deputy governors KC Chakrabarty and Anand Sinha had met the CEOs of a dozen major banks in February to discuss their asset quality. The banks had told RBI at the time that while asset quality continued to be a concern for banks, some had been trying to focus on smaller accounts to improve quality of assets.

RBI Governor Duvvuri Subbarao had said even in April that RBI had told banks to improve the risk management practices in order to detect bad loans before they went bad. The Monetary Policy unveiled by RBI in April proposed that banks put in place a robust mechanism for early detection of signs of distress and measures, including prompt restructuring in case of viable accounts wherever required, with a view to preserving the economic value of such accounts. The policy also mandates banks to have proper system-generated segment-wise data on their NPA accounts, write-offs, compromise settlements, recovery and restructured accounts.

RBI, however, isn’t too concerned just yet on the loan recast moves by banks. In April, RBI Deputy Governor Sinha had pointed out that such steps were often seen as necessary by banks and after recast around 80 percent of loans were standard while only 20 percent at the most tended to go bad.