For state-run banks, delayed economic recovery would mean more pain from restructured loans

The writing is on the wall. It is quite understandable if one argues that seven months aren’t enough for any government to change the fortunes of a weak economy and reverse the pessimistic sentiments. Beyond the positivity in words, it takes lots of efforts to restart a long-paralysed economic engine and get it back on the growth-path. The hard reality is that there aren’t any signs of revival on the ground as yet as reflected in the factory output numbers. Indeed, the government is working towards unclogging the system and fast-tracking the clearance process. But, on the face of it, it looks like one wouldn’t see any major reversal in the trend at least for the next few quarters, before things start looking up. That time delay, in all likelihood, would mean that India’s public banks, which are neck-deep in stressed assets, will have to prepare themselves to embrace more pain from stressed assets as a major chunk of restructured loans have begun to slip into the non-performing asset (NPA) category. Indian banks resorted to massive restructuring of troubled loans, especially those in core sectors, such as infrastructure and power, in the aftermath of 2008 global financial crisis, when prolonged economic slowdown gripped world economies, which spilled over to the domestic economy. Recasts were done for some large ticket loans and also at industry levels. Banks did so to prevent classifying those loans as NPAs. Majority of the restructuring were done in infrastructure and power sectors under various channels. Banks typically do recasts under the corporate debt restructuring (CDR) channel and on a bilateral basis, by giving repayment holidays (moratorium) of 1-2 years, and extended loan repayment periods or even a haircut (sacrifice) in some cases. The fair expectation was that once the economy picks up momentum, these loans will get out of the recast facility. But in the absence of any strong revival yet, chances of these loans turning NPAs are now high, analysts say. The moratorium period given to many of these projects is over, post which companies will have to begin repayments. [caption id=“attachment_2014305” align=“alignleft” width=“300”]  AFP Image[/caption] Here is where things stand: Until now, total amount of restructured loans on the books of banks is estimated close to Rs 6 lakh crore. On a cumulative basis, banks have restructured Rs 3.67 lakh crore under the CDR mechanism, until September end. Of this, Rs 2.62 lakh crore are live cases. An equal amount of loans are estimated to have restructured under the bilateral recast facility as well. Theoretically, loan restructuring is a temporary arrangement banks offer to the stressed borrower to come out of the troubled phase. But, if the company is unable to revive its operations or fails to perform, banks have no option but to take these cases out of CDR and classifying them as bad loans. In the September quarter, number of failed cases, which were taken out of CDR stood at 14 with the total loan mount to the tune of Rs 8,356 crore, while the number of cases exited successfully were nil. Similarly, in the June quarter, the number of failed cases stood at 9, worth Rs 8,706 crore loans. Again, the number of successful cases was nil. In short, despite the loan restructuring facility provided by banks to troubled companies, not a single company has managed to successfully exit from the CDR mechanism in the last six months. On the contrary, the bad loan pile has only grown bigger. This is evidently a bad trend and signals what is in store in the future unless recovery takes place. Total bad loans of 40-listed Indian banks, until September, stood at Rs 2.7 lakh crore. Along with the fresh NPA cases, this pile up will likely grow even further with more and more banks reporting new slippages from the restructured loan portfolio. Together, with rejigged loans, stressed assets constitute over 14 percent of the total bank loans as of end-September. For instance, in the September quarter, the country’s largest lender, State Bank of India reported Rs 1,700 crore fresh slippages from restructured loans as against Rs 1,242 crore in the June quarter. “This scenario is likely to worsen in the approaching quarters since, in the absence of economic recovery, more companies are failing to service their loans to banks,” said Abhishek Kothari, banking analyst at Quant Broking Pvt Ltd. Despite the talk of economic revival, not many stalled projects have taken back to functioning mode so far this fiscal, bankers said. Also, no new projects are coming up, resulting in sluggish demand for bank loans. Banks are sitting on huge cash piles unable to deploy the money generated from incremental deposits, in turn, leading to higher carry cost. The worst hit is the infrastructure sector, which constitutes 20.19 percent of the total CDR loans or Rs 52,982 crores. This is followed by iron and steel, 16 percent or Rs 42,655 crore and power, constituting 12 percent or Rs 31,036 crore. This scenario is unlikely to get any better at least in the foreseeable quarter, especially in the infrastructure sector. Further, delays in project implementation also lead to cost overruns for companies requiring additional capital. Given that majority of the stressed assets are on the books of public sector banks, more pain will be visible on their balance sheets going ahead. This would also mean higher capital requirement for these lenders since current norms require banks to set aside huge amount of capital to cover stressed assets. For fresh restructured loans, banks need to set aside 5 percent of the loan value, while for a loan that has gone fully bad, this can rise equal to the loan amount. Besides the capital burden arising out of bad loans, banks also need to raise substantial amount of capital, estimated about Rs 2.5 lakh crore to conform to the advanced Basel-III requirements. For the Narendra Modi government, which is struggling to manage its finances, such additional capital burden will be too much to handle. Economic recovery still remains uncertain and is something that is heavily dependent on global factors, even if one presumes that the government manages to address the concerns on the domestic front in the next few months. As Firstbiz has argued in the past, one of the reasons for the pile-up of stressed assets (bad and restructured loans) in state-run banks is the lack of autonomy of these entities to conduct business and also the misuse of the CDR mechanism. Banks have rampantly recast loans where reasons of stress were not necessarily genuine. Some of the state-run banks, like Kolkata-based United Bank of India, have already begun to show the signs of immense stress on their books with their bad loan ratio ballooning to double-digits The time is perhaps right for the government to look at privatising some of the state-run banks and, thus, increase the operational efficiency of these entities, before it is too late.