What are Restructured Loans?
When a company is unable to service its loans to the banks, the banks have to decide to choose one of the courses: Either declare the loan as ‘default’ or restructure the loans.
Restructured loans stay on bank's books as assets unlike a default for which the bank has either to write off the loan amount or make provisions for the same. Banks, while restructuring, expect that the borrower will come out of the financial mess and repay the loan at a later stage.
Sometimes they do, sometimes they don't.
What is the problem?
Banks always keep a certain amount of reserves to take care of such losses which arise when the loans go sour. However, the lower Reserve Coverage Ratio of Indian banks make them prone to problems if large amount of loans turn sour. In fact, India has the lowest Reserve Coverage Ratio in Asia. Restructured loans have a high probability, as high as 20%, to become NPAs (Non Performing Assets) or bad loans. Simply put, these are the loans which are not repaid and any losses have to be written off by the banks. It impacts the banks' profitability.
How big?
Now, rating agency CRISIL estimates that a record Rs 2L crores of loans will be restructured in FY12 up from Rs 1.25L Crores that were restructured last fiscal. If, even 20% of this humungous amount turns sour then the banks will have to take a hit of around 40K Crores on their balancesheets. There are chances of the figure of 20% to exceed going forward due to the continual economic gloom world over.
.png)
The situation gets worse due to a 'smart' step taken by the banks called as 'evergreening of loans'. It means that the banks will give additional loan to the debtor, generally on lenient terms, so that he can repay his earlier loan, may be partially, and look forward to service the new one. Historically, very few companies have managed to repay the overall loans and banks, meanwhile, kept taking hits in their profitability.
Putting it in short and scary language, if this trend is continued, it could mean that several banks default and send the economy in a bigger downward spiral.
At this point of time, I would like to ask a question: When RBI has mandated that no second education loan is given to a student who hasn't repaid his first education loan, why the same norms are not there for companies?
Why is there so much of confusion?
Banks generally don't disclose the names of the borrowers whose loans have been restructured. However, when big accounts turn bad, market comes to know about it.
Bankers are confused over the definition of a restructured asset. Today, the market counts all restructured asset as an NPA which has 20% likelihood. However, the impact of such confusion drags down the prices of the banks that have large restructured assets on their books. SBI Chairman Mr. Pratip Chaudhuri wants that RBI clears its position regarding the restructured assets and set a timeline for such assets after which they should be considered as NPAs.
Moody's have downgraded the Indian banks fearing that high inflation levels, monetary tightening and rising interest rates will the asset quality of the Indian banks worse in the coming months. All the above factors point towards a low growth phase where the number of bad loans will grow exponentially. In such a situation, banks should have definite answers to the auditors regarding the status of any loan.
Most of the loans, about two-thirds, that have been restructured in 2012 are of the order of 1000 Cr. or above. Banks have not exactly accounted them in their books. If, in the coming days, they turn bad one by one, then it will put a lot of stress on the functioning of the banks.
The loan growth is already showing signs of slowdown; NIM is going down for several banks while the NPAs are rising. There is a good probability that as and when the stress on the banks increases and they are forced to accept the un-payable debts as NPAs, the need for debt restructuring will increase further.
Who are the menace-makers?
Major Companies whose loans have been restructured include telecom tower giant GTL Infra (about 16K Cr.), Five-star chain Hotel Leela (4K Cr.), State Electricity Boards (SEBs), Air India, 3i Infotech (2K Cr) etc.
What is there for everyone (Debtors and Creditors)?
While loan restructuring, companies get the benefit of getting longer duration and easier norms for the repayment of their loans. Banks gain as it prevents them from acknowledging such loans as bad loans in the books. This way, banks try to preserve the ‘economic value’ of such loans. That makes the shareholders happy. Moreover, It helps the present executives too to save their face.
However, if the banks decide not to go for a restructuring and rather force the debtor to repay, the debtor might decide to sell off his assets. Recent example is of Indian liquor baron, Vijay Mallya, whose loss making airline has created a debt pile of about Rs 7000 cr. Banks, after giving ample time to Mr. Mallya, have now started to force him to repay. This has led to a speculation in the market that in the coming months, Mr. Mallya may sell off some of his properties.
As per Motilal Oswal Report, the combined quantum of NPAs and the restructured loans have risen to 7.3% in FY12 from 5.1% in FY11. State Electricity Boards (SEBs) and Air India account for 1.4% of such loans.
What's RBI doing?
RBI has mandated the following things to banks to overcome their problems:
The advice of the apex bank seems inadequate. However, the financial gloom has tied its hands too.
Final Word:
It seems that companies have found CDR or Corporate Debt Restructuring as a simpler way to transfer their pain to the books of the banks without changing their ways of operations. It's necessary that they should reduce their over-leveraging. Restructuring of loans should be taken only when the reasons for the slippages are not in the hands of the management. Moreover, banks should stop the practice of Evergreening of loans to prevent the axe of hidden threats to chop off the Indian Banking Industry altogether.
When a company is unable to service its loans to the banks, the banks have to decide to choose one of the courses: Either declare the loan as ‘default’ or restructure the loans.
Restructured loans stay on bank's books as assets unlike a default for which the bank has either to write off the loan amount or make provisions for the same. Banks, while restructuring, expect that the borrower will come out of the financial mess and repay the loan at a later stage.
Sometimes they do, sometimes they don't.
What is the problem?
Banks always keep a certain amount of reserves to take care of such losses which arise when the loans go sour. However, the lower Reserve Coverage Ratio of Indian banks make them prone to problems if large amount of loans turn sour. In fact, India has the lowest Reserve Coverage Ratio in Asia. Restructured loans have a high probability, as high as 20%, to become NPAs (Non Performing Assets) or bad loans. Simply put, these are the loans which are not repaid and any losses have to be written off by the banks. It impacts the banks' profitability.
How big?
Now, rating agency CRISIL estimates that a record Rs 2L crores of loans will be restructured in FY12 up from Rs 1.25L Crores that were restructured last fiscal. If, even 20% of this humungous amount turns sour then the banks will have to take a hit of around 40K Crores on their balancesheets. There are chances of the figure of 20% to exceed going forward due to the continual economic gloom world over.
Putting it in short and scary language, if this trend is continued, it could mean that several banks default and send the economy in a bigger downward spiral.
At this point of time, I would like to ask a question: When RBI has mandated that no second education loan is given to a student who hasn't repaid his first education loan, why the same norms are not there for companies?
Why is there so much of confusion?
Banks generally don't disclose the names of the borrowers whose loans have been restructured. However, when big accounts turn bad, market comes to know about it.
Bankers are confused over the definition of a restructured asset. Today, the market counts all restructured asset as an NPA which has 20% likelihood. However, the impact of such confusion drags down the prices of the banks that have large restructured assets on their books. SBI Chairman Mr. Pratip Chaudhuri wants that RBI clears its position regarding the restructured assets and set a timeline for such assets after which they should be considered as NPAs.
Moody's have downgraded the Indian banks fearing that high inflation levels, monetary tightening and rising interest rates will the asset quality of the Indian banks worse in the coming months. All the above factors point towards a low growth phase where the number of bad loans will grow exponentially. In such a situation, banks should have definite answers to the auditors regarding the status of any loan.
Most of the loans, about two-thirds, that have been restructured in 2012 are of the order of 1000 Cr. or above. Banks have not exactly accounted them in their books. If, in the coming days, they turn bad one by one, then it will put a lot of stress on the functioning of the banks.
The loan growth is already showing signs of slowdown; NIM is going down for several banks while the NPAs are rising. There is a good probability that as and when the stress on the banks increases and they are forced to accept the un-payable debts as NPAs, the need for debt restructuring will increase further.
Who are the menace-makers?
Major Companies whose loans have been restructured include telecom tower giant GTL Infra (about 16K Cr.), Five-star chain Hotel Leela (4K Cr.), State Electricity Boards (SEBs), Air India, 3i Infotech (2K Cr) etc.
What is there for everyone (Debtors and Creditors)?
While loan restructuring, companies get the benefit of getting longer duration and easier norms for the repayment of their loans. Banks gain as it prevents them from acknowledging such loans as bad loans in the books. This way, banks try to preserve the ‘economic value’ of such loans. That makes the shareholders happy. Moreover, It helps the present executives too to save their face.
However, if the banks decide not to go for a restructuring and rather force the debtor to repay, the debtor might decide to sell off his assets. Recent example is of Indian liquor baron, Vijay Mallya, whose loss making airline has created a debt pile of about Rs 7000 cr. Banks, after giving ample time to Mr. Mallya, have now started to force him to repay. This has led to a speculation in the market that in the coming months, Mr. Mallya may sell off some of his properties.
As per Motilal Oswal Report, the combined quantum of NPAs and the restructured loans have risen to 7.3% in FY12 from 5.1% in FY11. State Electricity Boards (SEBs) and Air India account for 1.4% of such loans.
What's RBI doing?
RBI has mandated the following things to banks to overcome their problems:
- Focus on smaller accounts to improve quality of assets.
- Improve the risk management practices in the bank in order to prevent bad loans.
- Mandated banks to have proper system-generated segment-wise data on their NPA accounts,
- write-offs, compromise settlements, recovery and restructured accounts.
The advice of the apex bank seems inadequate. However, the financial gloom has tied its hands too.
Final Word:
It seems that companies have found CDR or Corporate Debt Restructuring as a simpler way to transfer their pain to the books of the banks without changing their ways of operations. It's necessary that they should reduce their over-leveraging. Restructuring of loans should be taken only when the reasons for the slippages are not in the hands of the management. Moreover, banks should stop the practice of Evergreening of loans to prevent the axe of hidden threats to chop off the Indian Banking Industry altogether.
UPDATE: CRISIL is revising its estimate for the quantum of restructured loan on banks' portfolio to 3.2 Lakh Crores from the present 2.2 Lakh Crores.
ReplyDelete