1. Public sector banks (PSB) restructured loans down 4%, trend to last

Public sector banks (PSB) restructured loans down 4%, trend to last

The performance of restructured loans through the CDR forum continued to be a large source of concern in FY16

By: | Published: July 18, 2016 6:06 AM

Banks have reported 40% y-o-y decline in outstanding restructured loans to 4.2% led by 75% decline, 12% increase in risk reductions partly due to SEB repayment and 100% y-o-y growth in slippages from restructured loans. 25% of the slippages or 25% of opening restructured loans slipped into NPLs. There would be further decline in this ratio as we expect the trend of low fresh restructuring and higher repayment or slippages to continue.

Our analysis for FY2016 on outstanding restructured loans of all public banks shows a decline of 40% y-o-y, which implies a decrease of 310bps y-o-y to 4.2% of loans. On an outstanding basis, we are now below FY2012 levels. Fresh restructuring declined 75% y-o-y as the standard asset classification came to a close and some pending transactions of FY2015 were completed. Restructuring through the CDR forum declined 90% y-o-y and 65% y-o-y on a bilateral basis. Central, Canara, State Bank of Mysore, PNB and Punjab and Sind Bank saw the sharpest decline of less than 50% in restructured loans aided by repayment of Discom bonds.

25% of slippages or 25% of opening restructured loans slipped in FY2016

The rising trend of slippages from restructured loans continued in FY2016. Of the overall slippages in FY2016, 25% came from restructured loans. In other words, 25% of opening restructured loans slipped in FY2016 as compared to 15% in FY2015 and 11% in FY2014. We note that the recent AQR exercise had a large contribution from the rise in slippages from the restructured loan portfolio. On the other hand, the reduction due to satisfactory performance has been flat at 10% of opening restructured loans. We do believe that a large share of upgrades is due to the recent Uday scheme which has resulted in transfer of loans to bonds of most banks.

Failure of CDR cases high; relatively better performan- ce on bilateral loans

The performance of restructured loans through CDR continued to remain a large source of concern. Of the total restructured loans, 15% were through CDR but over 40% of the total downgrades. A positive relief is that there is a sharp decline in references and acceptances of loan restructuring through this forum as the outstanding loans are 1.5% today. We note there is a decline in restructured loans in the bilateral segment pertaining to distribution companies. These are chunky exposures where they are yet to improve their cash flows while their repayment cycle has already begun. We note that one distribution company has been specifically requesting for a change in repayment schedule which could put all banks under serious risk.

Recent instances of restruct- ured loans appear to be a lot more stringent

While we note that the share of restructured loans has been on the rise, we do believe that banks have been taking many more precautions to prevent it, especially in some sectors. We note that banks have the option to enforce strategic debt restructuring (SDR), but most banks are already enforcing this through similar mechanisms that allow equity conversions. In many instances, banks have been looking to convert FITL (Funded Interest Term Loan) to equity. Further, we believe banks and borrowers have looked at the 5/25 structure and the recently announced S4A quite aggressively. This should lower instances of fresh restructuring from now.

Sharp fall in fresh restructuring

The outstanding share of restructured loans declined 310bps y-o-y in FY2016 to 4.2% of loans. The decline is broadly similar across the major segments like CDR and bilateral. The sharp decline in restructured loans can also be a function of the recent AQR exercise undertaken by the RBI which identified a few loans as NPLs.

Absolute amount of fresh restructuring declines 75% y-o-y

Fresh restructuring showed sharp decline in FY2016 as the sunset clause which gave banks the benefit of asset qualification was removed. Only some of the pending cases of FY2015 were implemented in H1FY16. We note that there was hardly any increase in H2FY16. Most borrowers and banks looked to change the repayment schedule and take advantage which is no longer applicable from FY2015. Part of the decline in fresh restructuring through CDR could be explained by the change in tackling of probable bad loans by banks. With the introduction of JLF, banks have been able to identify these loans faster and look to address concerns at the earliest rather than waiting as we saw in earlier years.


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