Some of the problems in the power sector are the result of the lack of political will; for instance, should the governments be willing to raise tariffs, which, on average, would need to be upped by as much as 50%, some of the damage can be controlled. Right now though that seems like a tall order. Also, while a fair share of bank loans to the power sectorof just under R3 lakh croreappear to be in trouble, its not just exposure to the power sector alone thats likely to stress bank balance sheets over the next year or so; there are troubled spots in telecom, textiles, commercial real estate, agriculture, SME and, to a smaller extent, microfinance. There are also loans given to other financial intermediaries like NBFCs. While most of the larger and better-run NBFCS are well-capitalised, there could be a few that end up in trouble. Moreover, bankers hint that regions of political turmoil, such as a Telangana in Andhra Pradesh, are becoming increasingly vulnerable to loan losses, whether corporate or retail.
Again, the level of non-performing assets (NPAs) from small-ticket loans may be understated because not all the state-owned banks have migrated fully to an automated NPA recognition system. Union Bank of India gave the Street a bit of shock earlier this week when it announced that the fresh delinquency ratio for the three months to September had risen to 5.8% of the past years loans and that 60-70% of this was due to the transition from a manual to an automated system. Consequently, the rise in gross NPAs was a huge 46% and, whats more, there was sharp 13% sequential growth in restructured loans. The story could turn out to be the same for a couple of other PSU banks as they transit the small-ticket loans, accounting for 8-10% of total loans, to an automated system.
Union Bank of India could turn out to be a bit of an exception, and the problem may not have gotten out of hand just yet: gross restructured assets plus NPAs together are roughly at around 6% for the banking system as a whole and, should things take a turn for the better, loan losses could probably peak at 8% levels or so by March 2013. However, should the economy continue to slow down and interest rates take awhile to come off, cash flows at smaller companies are bound to get choked, causing stress levels to even double from current levels. Unless theres a near-term rebound in the economy, banks balance sheets will be impacted, though not all of the stress may show up as NPAs because the bulk of the loans that look dodgy just now could be restructured. Between 2008 and 2010, slippages are estimated to have risen a compounded 38% to R64,000 crore; in the five years before that, they had risen at a more moderate 10% compounded.
Theres also another estimate which says that between 2009 and 2011, more than R1 lakh crore worth of loans were restructured. Unfortunately, PSU banks, together with a couple of private sector banks, also have large exposures to the aviation sector where they have bailed out two large corporationsAir India and Kingfisher. Kingfisher owes banks at least R6,000 crore and the amount for Air India is twice that. Earlier this year, a clutch of 13 bank lenders picked up a 23.37% stake in the airline at a price of R64.50, whereas the low for the stock, in the past month, was R18.85. There are other instances of companies owing banks large sums; for instance, GTL has piled up a debt of R14,000 crore and recently ICICI Bank became the largest shareholder in the company, picking up a stake of 29.3% by invoking the pledged shares. The corporate debt restructuring (CDR) cell is attempting to find a solution to the companys problems but its possible banks will have to take a haircut.
The story doesnt seem to change: Essar Steel was bailed out by IDBI in 2000 when it needed to pay back holders of $250 million worth of floating rate notes. ICICI Bank, which had lent Arvind Mills around R500 crore, took a big haircut of about 40% to help out the firm that ran up a debt of close to R3,000 crore. Other banks in the consortium took bigger haircuts of over 50% while some settled for a five- or a ten-year rollover. Wockhardt, which had defaulted to its FCCB lenders, has been asked by the courts to pay up, but the company still owes banks a whole lot of money and has asked to be bailed out. Given the problems in the power sector, there could be a few casualties. Historically, banks have been reluctant to let companies go bust or they have been pressured by those in power to take the CDR route. However, while taking a hit by reducing the interest rate, extending the repayment period, allowing a moratorium or taking on more risk by converting debt into equity, banks have not benefited from the upside when a corporate or the conglomerate that it belonged to finally recovered. A recompense clause needs to be built into the legislation so that banks can claim their fair share of the upside.