Quality of new debt recast proposals deteriorating: report

50% of new cases are being referred to second restructuring

As growth continues to falter, the Indian corporate are increasingly going for the second round for loan restructuring as first one didn't help them much.

The total Corporate Debt Restructuring (CDR) has reached Rs 1,87,400 crore at the end of September quarter which is about 4% of the total bank credit.

The CDR cell is getting increasing number of proposals to restructure the debt and the quality of cases referred for CDR is also deteriorating with 40-50% cases are being referred to second restructuring, a report by brokerage firm Prabhudas Lilladhar said. 

According to the current Reserve Bank of India (RBI) norms, any second restructuring needs assets to be treated as non-performing assets (NPA). The brokerage said the banks are increasingly using CDR cell for second restructuring, with proportion of these cases increasing from 10-20% to over 40-50%.

The higher second restructuring is negative for the banking industry as slippages from these cases will be substantially higher than first restructuring ones and  might also invite RBIs attention, brokerage firm said.

The RBI increased the provisioning requirements from 2% to 2.75% for the restructured assets in second quarter review of monetary policy which is expected to hit profitability of the banks from this quarter.

The CDR cell continues to expect the restructuring cases in between Rs 20,000-25,000 crore per quarter, it added.

CARE research in its report said that, restructured assets (as a percentage of advances) grew sharply by 40 basis points (q-o-q) to 5.9% in the second quarter on account of  mounting stress in large-corporate advances and continued challenging business environment in mid-corporate and SME sector.

A senior public sector bank executive said, “in the most first restructuring cases only few reliefs and concessions were extended as both [the banks and customers] thought it would be sufficient but now since economy is yet to recover in the hindsight we are looking that those concessions weren’t enough.”

“Second restructuring [where NPV is protected] is taken as one last chance before declaring it as NPA, this executive said and we can save at least 75% of assets by restructuring them which otherwise would have gone bad,” he added.