Quality of new debt recast proposals deteriorating, says report

As many as 50 per cent of the new cases are referred to second restructuring

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

At end-September, the total corporate debt restructuring (CDR) touched Rs 1,87,400 crore, which is about four per cent of the total bank credit.

According to a report by brokerage firm Prabhudas Lilladhar, the number of debt-restructuring proposals reaching CDR cell is on the rise. However, the quality of cases is deteriorating with 40-50 per cent of them are being referred to second restructuring, the report said.

According to Reserve Bank of India (RBI) norms, in second restructuring, assets are to be treated as non-performing assets (NPA). The brokerage said the proportion of second restructuring cases has increased from 10-20 per cent to over 40-50 per cent.

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

In the second quarter review of monetary policy, the RBI increased the provisioning requirements from two per cent to 2.75 per cent for the restructured assets. This 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.

According to a CARE Research report, restructured assets (as a percentage of advances) grew sharply by 40 basis points quarter-on-quarter to 5.9 per cent in the second quarter. This is on account of mounting stress in large-corporate advances and continued challenging business environment in the mid-corporate and SME (small and medium enterprises) sectors.

A senior public sector bank executive said, “In most first restructuring cases, only a few reliefs and concessions were extended as both the banks and customers thought it would be sufficient. But now that the economy is yet to recover, we feel that those concessions weren’t enough.”

He added that the second restructuring is taken as the last chance before declaring it as NPA. ‘We can save at least 75 per cent of assets by restructuring them, which otherwise would have gone bad,” he said.

CASE COUNT
Quarter	Cases referred  (No./amount Rs  cr*)	Cases approved  (No./amount Rs  cr*)	Percentage of  cases approved
June ‘11	323/1,43,200	252/1,19,100	78
September ‘11	341/1,64,300	259/1,21,200	76
December ‘11	364/1,83,500	276/1,42,500	76
March ‘12	392/2,06,500	292/1,50,500	74
June ‘12	433/2,27,000	309/1,68,500	71
September ‘12	466/2,45,900	327/1,87,400	70
*incremental                                   Source: Prabhudas Lilladhar Research