Failures of loan recasts starting to outpace successful turnarounds

Written by Vishwanath Nair | Mumbai | Updated: Feb 13 2014, 06:04am hrs
RupeeThe majority of slippages over the past year are the result of companies failing to meet interest and principal repayments. PTI
Even as bankers continue to recast loans in the hope of recovering their money, a larger share of such assets is turning toxic. While slippages of restructured loans into non-performing assets (NPAs) was not uncommon in the last few years, the number of failures is starting to outnumber the successes.

Between April and October 2013, the number of accounts that exited the corporate debt restructuring (CDR) cell because the companies concerned were unable to turn around the business was twice the number that were successful in reviving the business. The trend is disconcerting given that the bulk of restructuring R3.25 lakh crore at the end of September 2013 has taken place in the last couple of years. An assessment by Macquarie Research shows 45 companies exited the CDR cell successfully between April and October last year while 90 were compelled to go after failing to comply with the terms.

Going by the current trend, it would appear that the slippage of 25-30% pencilled in by the Reserve Bank of India (RBI) is realistic although bankers say one in every five loans recast is turning bad. Sectors such as steel, textile, infrastructure, construction and the hotel industry are examples where the default rate is high, bankers said.

The working group headed by B Mahapatra, executive director, RBI, which reviewed the guidelines on restructuring of advances estimated that 25-30% of restructured loans may slip into NPA category. This assumption was based on the fact that restructurings have taken place only in the recent past with long moratorium and repayment holidays and the repayment behaviour of such borrowers is still not known, the committee observed.

The majority of slippages over the past year are the result of companies failing to meet interest and principal repayments. In the October-December quarter, two companies with loans of Rs 1,500 crore exited the CDR successfully while the accounts of 12 firms with borrowings of Rs 4,100 crore needed to be pulled out.

A look at the data over a longer time frame suggests that increasing failures appear to be a more recent trend. Numbers from the CDR cell show that at the end of December 2013, loans worth Rs 29,038 crore across 115 borrowers moved out of the cell unsuccessfully in their attempts to pay back the money. However, assets worth Rs 52,625 crore were successfully restructured.

The first lot of restructuring, after the 2008 crisis, was not intended to flop because we believed companies would survive the global turmoil. However, some of those loans are now turning bad with the domestic operating environment worsening, said M Narendra, chairman and managing director, Indian Overseas Bank.

Between January and December the value of loans recast was close to Rs 75,000 crore while the value of loans referred stood at Rs 1.4 lakh crore. Given the slowdown in the economy, bankers believe more borrowers will need help to tide over the situation. They anticipate at least Rs 15,000-20,000 crore will be restructured before March 2014.

The run rate for CDR referrals remained high at Rs 11,000 crore in January. Among the bigger requests for restructuring is that put forward by the Hyderabad-based IVRCL, which is looking for easier terms to repay Rs 6,500 crore. Smaller firms that have put in requests for lenient repayment conditions include the Nagpur-based Gupta Coal India promoted by Padmesh Gupta and with interests in coal, mining and logistics which wants Rs 2,000 crore recast. Power infrastructure provider Deepak Cablesin Bangalore and promoted by K Surya Rao is also hoping to recast Rs 1,000 crore.

VR Iyer, chairman and managing director, Bank of India had said after announcing the banks October-December results that slippages from restructured assets to NPAs was on average about 16%. Iyer added that close to Rs 300 crore had been restructured during the quarter and the estimated pipeline was around R1,500 crore. Most of the proposals in the CDR cell will be restructured this quarter itself, the CMD said.

At ICICI Bank, restructured advances during the quarter were Rs 1,776 crore and the management indicated there was a pipeline of Rs 3,000 crore.

SS Mundra, CMD, Bank of Baroda, expects a restructuring pipeline of Rs 1,500-2,000 crore in the January-March period.

Union Bank of India restructured loans worth Rs 1,004 crore in the October-December period, of which Rs 640 crore is owed by state discoms. The bank has a restructuring pipeline of Rs 1,800 crore for the January-March period, a big chunk of which will be accounted for by one account, Arun Tiwari, CMD, said.