Rs110,000 crore debt recast looms

Rs110,000 crore — or a fifth of a trillion dollars.

That’s the magnitude of corporate debt restructuring (CDR) Indian banks are staring at over the next two quarters, according to analysts.

That’s about 2.6% of the total banking system loans, and the process promises to compound the bad-loan headache of banks.

When a company is unable to service its financial obligations — which happens more during economic downturns — its debt is reorganised by lenders whereby the conditions on the loans — such as a moratorium on interest payments — are eased or tenure increased. Banks may also ask for equity position in the company, to forgive a part of the debt.

“Most recent CDR cell data (October-December) indicates Rs19,000 crore addition to approved CDR cases and similar number of fresh CDR references, including Air-India (Rs20,000 crore), short-term state electricity board restructuring (Rs30,000 crore) and fresh accretion. So we expect Rs110,000 crore accretion to the restructured books in the next six months,” said analysts, Adarsh Parasrampuria and Parul Gulati from Prabhudas Lilladher said in a note on Thursday.

Bankers said state electricity boards alone will form 1-2% of the total banking sector loans of which more than half may get restructured.

“Private power loans repayment will not happen in a hurry because there is hardly any repayment due. This is because a lot of these private powers are in the project stage. If there is no repayment due, there is no compulsion,” said a private sector banker requesting anonymity.

Airline loans, on the other hand, which form 0.5% of the total loans, are the next largest concern.

But considering the current debate over airline companies, bankers aren’t sure about the extent of restructuring that will take place. On the other hand, the textiles sector, which is classically perceived as a troubled one, has come up with fewer CDR requests, Parasrampuria and Gulati point out.

This rise in CDR cases will eventually add to non-performing assets (NPAs) in the next few years, according to another public sector banker.

On an average, gross NPAs of the banking sector may touch 3.5% from current 3% levels, he said. Others are more optimistic.

M Narendra, chairman and managing director, Indian Overseas Bank, sees the situation improving after 6 months.

If at all there is pain, it will be for 6 more months. After that international issues may get resolved and domestic rates will take a downward turn,” he said.

B Ravindranath, executive director, IDBI Bank, concurs, blaming the bad-loan bloat on a slowing economy and high interest rates.

His concerns remain in sectors such as textiles, steel, sugar and telecom towers. “Sure, CDR cases have gone up in the last one year, but companies will be able to repay their debt as the amounts are not that large,” he said.