Fresh round of loan recasts to be riskier for banks: Barclays

The banking system is likely to face a bigger challenge from restructured accounts in the current environment than they had faced after the global credit crunch following the sub-prime crisis during 2008-10, says a Barclays report.

"We are concerned about the high level of loan restructuring being undertaken by the domestic banks because we expect their experience with loan restructuring in the current environment to be worse than in FY09 and FY10," the research report said here today.

As per the report, the monetary easing played a major role in easing debt burdens in the past round of debt restructuring, which is not the case in the present situation.

"Monetary easing played a major role in easing debt burdens in the past. Furthermore, borrowers were also able to recapitalise and manage their debt burden by taking on unhedged forex liabilities. These factors are unlikely to be repeated in the current round," the report notes.

The report, however, points out that restructuring standards in the country are not stringent.

"Restructuring standards appear lax and (to) create perverse incentives...Specifically, restructuring is allowed even if the promoter 'sacrifice' is only 15% of the bank's sacrifice. Hence, borrowers can restructure with very little sacrifice, which we believe reduces the discipline that the threat of default normally places on the borrower," it warns.

It also says the provisioning norms are relatively low in comparison with those of other Asian economies and don't confirm to the accounting principles of conservatism.

Referring to specific banks, the report notes that State Bank of India and HDFC Bank have done limited restructuring in the past 12 months hence are in better position than the rest of the.