The surge in corporate debt restructuring is keeping investors jittery even as bankers preferred to play down their fears.
In 2011-12, restructured assets in the Indian banking sector increased by 60 per cent while from 2008-09 the compound annual growth rate (CAGR) is estimated at 43 per cent. "The rise in restructured assets is a reminder of ever-greening during the earlier episode of rising non-performing assets," noted Dhananjay Sinha, co-head institutional research, economist and strategist at Emkay Global Financial Services.
"The risk of willful default from such regulatory concessions and banks attempting to camouflage asset quality deterioration is high now. This backdrop exposes the banking system to unanticipated and disproportionate risk in the context of potential external shocks," he added.
The share of restructured loans in gross advances is higher for public sector banks compared to their private sector rivals. While for private bank's the proportion of restructured loans was at 1.6 per cent for state-run lenders it was at 5.7 per cent last financial year.
The Reserve Bank of India (RBI) has also expressed its concerns on unviable accounts getting restructured on the back of financial engineering. In July, 2012 a working group of RBI suggested that the regulator may do away with forbearance regarding asset classification, provisioning and capital adequacy on restructured loans two years from now.
Bankers, however, dismissed suggestions that restructured loans are likely to deteriorate asset quality of banks in coming years. "In India, the quality of restructured assets has not deteriorated significantly in the past. I don't see any reason why it will happen now. I think the fears are overstated," said a chief financial officer of a private bank who did not wish to be named.
Analysts and bankers, however, unanimously agree that in 2012-13 banks will continue their practice of loan recast as the macro environment continues to remain uncertain. "In our view, restructuring would continue in 2012-13, as economic conditions remain challenging. While higher restructuring in 2011-12 is a concern, the silver lining is that the sacrifice or net present value loss taken on state government entities was contained," Alpesh Mehta and Sohail Halai, analysts with Motilal Oswal Securities said in their recent report.
