Aggregate debt of 500 corporate borrowers is about Rs 28,76,000 crore; total restructured and bad debt of the banking sector at the end of June quarter stood at Rs 6 lakh crore
Stretched balance sheets of Indian companies may force banks to restructure loans up to Rs 1 lakh crore by March 31, before the new restructuring guidelines come into force from April 1, 2015. Restructuring is an exercise undertaken by the banks to give borrowers an extended tenure to repay their loans.
The process of restructuring loans helps lenders to clean their balance sheets by showing lower bad debt and lesser capital to be set aside as buffer. According to the existing guidelines by the Reserve Bank of India (RBI), if an account is restructured once, it is not classified as a bad debt unless it is a commercial real estate exposure. But starting April 1, 2015, even if banks restructure once, it will be considered a bad loan and banks will have to set aside higher amount of capital as a buffer.
Deep N Mukherjee, senior director, India Ratings, told dna, "Banks may consider an accelerated restructuring considering that the balance sheets of large companies are stretched with operating earnings not able to cover their repayments to the banks. Some of these accounts could deteriorate further to be tagged as a non-performing asset (NPA). The cumulative impact may be an incremental Rs 60,000 crore -Rs 1,00,000 crore of restructured assets in the banking system in the next five months."
The total restructured and bad debt of the banking sector at the end of first quarter ended June 30, 2014, stood at Rs 6 lakh crore. Of this, about Rs 3.30 lakh crore is restructured debt.
According to a study by rating agency India Ratings & Research on 500 corporate borrowers which account for the largest debt on the balance sheet, the aggregate debt of these companies is about Rs 28,76,000 crore, about 73% of the total bank lending to industry, services and the export sectors. Around 82 of these 500 largest borrowers have already been formally tagged as financially distressed. Another 83 (17%) of these top borrowers accounting for 9% of the overall debt of about Rs 2,43,100 crore, have severely stretched credit metrics, but are yet to be restructured.
MS Raghavan, chairman and managing director, IDBI Bank, however, said, "Many banks are seeing a conspicuous reduction in debt. For IDBI Bank, the fresh accretion of debt was just Rs 1,000 crore during the quarter."
Within these 83 corporates, operating profitability barely covers the interest required to be serviced in most cases, and there is also the absence of any strong parent. These corporates with severely weak credit metrics have limited expectation of an immediate improvement in profitability. However, these are not publicly tagged as financially distressed so far.
Potentially one-third to half of these 83 accounts could be in the category of SMA 2 (special mention accounts) with delays in debt servicing ranging between 61-90 days. If some of these corporates are unable to generate significant cash flow or infuse significant equity in the near term, they may be identified by their lenders for restructuring pursuant to the RBI guidelines.
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