Bad loans crisis: In shocking revelation, banks may take Rs 2.4 lakh crore haircut just to resolve 50 top NPA accounts

By: | Published: July 20, 2017 3:53 AM

These assets, with total debt of over Rs 4.3 lakh cr, account for about half of banks’ gross NPAs.

Bad loans crisis, bank, NPA accountsThe report said the economic value method has been applied to arrive at the sustainable level of debt.

Banks may have to take a haircut of Rs 2.4 lakh crore in order to resolve the 50 largest stressed assets in the system, according to a report by Crisil.

These 50 assets have a cumulative debt of over `4.3 lakh crore and account for about half the gross non-performing assets (NPAs) of the banking sector.

“The analysis shows these 50 large stressed assets may have to take haircuts of ~60% at an aggregate level, to arrive at sustainable level of debt,” the ratings agency said in the report on Wednesday.

Crisil has classified the likely haircuts into four categories — marginal, where the haircut required is less than 25% of the outstanding; moderate, where the haircut may range between 25% and 50%; aggressive, where the haircut could be between 50% and 75%; and deep, where a haircut of more than 75% may be required to arrive at a sustainable level of debt.
The report said the economic value method has been applied to arrive at the sustainable level of debt.

Metal companies, which account for 30% of the `4.3-lakh-crore debt pile, would require an aggressive haircut. Next in line, the construction sector, with 25% of the pie, would also need a haircut of anywhere between 50% and 75%. The power sector would need a haircut of between 25% and 50%. The sector accounts for 15% of the 50 largest stressed accounts.
Gems and jewellery, shipping, real estate, food products, textiles and real estate make up for the remaining 30%, and the aggregate stressed assets in these sectors would require a haircut of between 50% and 75%.

According to Crisil’s assessment, banks will need to make an incremental provisioning of about 20% against these assets over and above the provisions made so far.

According to Crisil, a majority of the debt requiring deep haircuts belongs to companies with unsustainable businesses, and asset sales, therefore, are necessary to recover monies.
Companies needing moderate or aggressive haircuts had gone for debt-funded capex, but then demand slumped, or had projects that ran into regulatory issues leading to significant time and cost overruns that made them unviable.

Companies needing marginal haircut are those facing temporary setbacks, which could be corrected over time, the report said. “It would be in the larger interest of the economy to pop the bitter pill of haircut than kick the can down the road,” Crisil said.

(With PTI inputs)

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