Rating agency CRISIL has said that it estimates the quantum of loans, expected to be ‘restructured’ during the current financial year, to be Rs 3,25,000 crore ($58 billion), against the earlier estimate of Rs 2,00,000 crore. This would mean near doubling of restructured loans as the country’s banking system saw around Rs 1,60,000 crore worth of loans restructured during the 15 months ended June 2012.

The majority of restructuring in the current year will be in loans to state power utilities (SPUs) and the construction & infrastructure sectors. The rise is a result of significantly higher funding challenges being faced by companies with large debt, CRISIL says in its research note.

“In recent months, availability of unsecured short-term loans from Indian banks has diminished. This is exacerbating refinancing and liquidity pressure, especially for the SPUs. This will lead to a significant increase in restructuring of SPU loans to nearly Rs 1.5 lakh crore. So far, SPU loans of Rs 0.6 lakh crore have been restructured,” said Pawan Agrawal, senior director, CRISIL Ratings.

Most likely SPU-loan restructuring will happen through a centralised scheme coordinated by the government. “Furthermore, inability to raise adequate equity in a timely manner is straining the balance sheets and financial flexibility of developers in infrastructure and construction sectors, resulting in an increased likelihood of restructuring,” adds Agrawal.

Other vulnerable sectors include iron and steel, textiles, and engineering.

“Around Rs 50,000 crore of these restructured loans may slip into NPAs, though this will depend on the terms of restructuring and fundamental viability of the projects and the companies. These slippages can aggravate the already stressed asset quality of banks by further increasing NPAs by 50 to 75 basis points beyond March 2013,” he added. The loans to SPUs are unlikely to slip into NPAs, given the support expected from state and central governments.

Despite continued weak growth and profitability in the corporate sector, the large restructuring will help limit the increase in the banks’ NPAs in the near term. According to CRISIL’s estimates, the lower GDP growth of 5.5 per cent expected in 2012-13 may result in increase in banks’ gross NPAs to 3.5 per cent by end-March 2013 from around 3 per cent at the end of June 2012. The increase will be driven largely by delinquencies in the micro, small and medium enterprises, and agriculture and allied sectors.

“The banks have sought to arrest the deterioration in asset quality through measures such as strong senior management focus on recovery, setting up dedicated teams for collections, and tightening of underwriting norms. While the banks’ adequate capitalisation, expected support from government of India for public-sector banks, and stable resource profiles will continue to support their credit risk profiles, any significant and sustained deterioration in asset quality and earnings may lead to weakening in the banks’ credit quality,” said Suman Chowdhury, director, CRISIL Ratings.

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