Banks may need Rs 1L cr to hedge high-risk lending to corporates

By: | Published: August 7, 2015 12:24 AM

PSBs will need Rs 93,000 crore, representing a loan haircut that banks may face, to revive the financial viability of distressed accounts, the report said

Banks may need up to Rs 1 lakh crore over and above their Basel-III capital requirement to manage the risks in exposure to highly-leveraged, large stressed corporates, India Ratings and Research said in a report on Thursday.
Of this, public sector banks (PSBs) will need Rs 93,000 crore representing the loan haircut that banks may face to revive the financial viability of distressed accounts, the report said.

“The shortfall may increase the government’s equity injection requirement compared with the Rs 70,000 crore announced on July 31,” said India Ratings.

Speaking to reporters, Ananda Bhoumik, senior-director, India Ratings, said the excess capital would be required in the form of write-offs for the stressed corporates to turn financially viable. “Obviously it is going to come through a series of negotiations and if banks are ready with the provisions, they are in a better position to negotiate. At this point, of course, with no provisions, they have their back to the wall and they have to continue supporting these companies,” he said.

Gr7

The agency estimates that banks need Rs 2.4 lakh crore to meet Basel III norms by FY19.

The report analysed 30 large stressed corporates, each with aggregate debt of over Rs 5,000 crore totalling to 7-8% of the overall bank credit. “Loans to these corporates are accounted as performing (most of them figure as SMA1/SMA2 accounts),” the report said, adding the power and other infrastructure sectors account for 50% of this exposure, while the iron & steel sector accounts for 32%.

It said the debt reduction or haircut required would be around 24% of the bank debt analysed in the report and in absolute terms, the amount of debt reduction needed is around Rs 1.04 lakh crore.

“We expect private sector banks and large PSBs to be better placed in handling potential credit cost hikes from these large stressed corporates, given their sufficient operating and capital buffers. However, mid-sized PBSs will be the most affected, given their thin operating margins and weak capitalisation,” the report added.

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