Longer debt recast line likely

New rules likely to force promoters for sale of assets and businesses to salvage company

Within the next two years, the number of cases referred for debt restructuring might go up substantially, with the Reserve Bank of India proposing a tougher regulatory regime in this regard by mid-2014, experts said.

A senior executive with the Indian Banks’ Association said it was possible that banks would see a rush of proposals before the end of the presently more lenient regime. That would also increase the provisioning burden. He said IBA was yet to finalise views on the proposed regime.

Even without the new rules, said the official, reference activity for debt recast would stay elevated this financial year due to the economic slowdown or recession in some parts of the world. N Takkar, chief executive of rating agency Icra, said the business environment was stressful. The number of recast cases would grow in the interim before strict norms kicked in after two years, he said.

The stretched economic slowdown, and the effects of high input and interest costs continue to drive companies into a debt recast. The amount of loans referred for the corporate debt restructuring (CDR) process grew almost four-fold to Rs 19,500 crore in April-June 2012 from Rs 4,680 crore in the same quarter of 2011-12.

An RBI panel has suggested raising the provision from two to five per cent over two years for restructured stock, to recognise the inherent risk on these. For fresh restructuring, the revised norms would apply with immediate effect. This would put a strain on public sector banks (PSBs), already under the burden of non-performing assets and portfolios of restructured loans. There could be a five-10 per cent hit on the bottom line of PSBs, according to a report by broking house Edelweiss Securities.

PERFORMANCE SNAPSHOT Bank books                                                                                  (Rs crore)
	March 2009	March 2010	March 2011
Gross advances	27,93,572	32,71,896	40,12,079
Standard advances	27,25,350	31,90,080	39,17,991
(of which restructured)	60,379	97,834	1,06,859
Gross NPA	68,222	81,816	94,088
Gross NPA as % of  gross advances	2.44	2.5	2.35
Restructured standard advances as % of gross advances	2.2	2.99	2.66

A Standard Chartered Securities report said banks would be hit but the recast would increase discipline among the lenders, while restructuring loans. Concurring with this aspect on discipline, Icra’s Takkar said the flexibility to recast debt will be severely restricted, perhaps nudging banks to declare stressed accounts as non-performing loans.

In CDR, banks restructure loans in consultation with the companies concerned. Also, there are sectoral packages being worked out, as with textiles (Rs 36,000 crore) and state-owned power distribution companies. Other susceptible sectors include aviation, construction, engineering, steel, and telecom infrastructure.

CRISIL expects the amount of loans likely to be restructured by banks over 2011-12 and 2012-13 at nearly Rs 200,000 crore. A sizable proportion of the restructuring comprises large-ticket corporate exposures; total restructured loans will account for 3.5 per cent of the total advances as at March 2013. Further, banks’ gross NPAs are set to increase to 3.2 per cent by March 2013, from 2.9 per cent as of December 2011.

Another fallout would be giving a further push to the restructure of businesses, to salvage the company in question. Anuj Jain, sector head, banking, with CARE, said the tougher norms will make promoters of companies consider other options including hiving off a business or infusion of equity by a third party.