Loan restructuring to reach Rs.3.25 trillion by March 2013

By Accommodation Times Bureau

State power utilities and infrastructure companies to account for majority of restructuring: CRISIL

CRISIL believes that loans restructured by Indian banks may increase sharply to Rs.3.25 trillion
between 2011-12 (refers to financial year, April 1 to March 31) and 2012-13, against the earlier
estimate of Rs.2.0 trillion (refer to CRISIL’s release, ‘Loan restructuring to touch Rs.2 trillion by
March 2013’, dated April 24, 2012). Loans of Rs.1.6 trillion have already been restructured in 2011-
12 and in the first quarter of 2012-13. The majority of restructuring will be in loans to the state power
utilities (SPUs), and the construction and infrastructure sectors. The rise is a result of significantly
higher funding challenges being faced by companies with large debt.

Says Mr. Pawan Agrawal, Senior Director, CRISIL Ratings, “In recent months, availability of
unsecured short-term loans from Indian banks has diminished. This is exacerbating
refinancing and liquidity pressure, especially for the SPUs. This will lead to a significant
increase in restructuring of SPU loans to nearly Rs.1.5 trillion. So far, SPU loans of Rs.0.6
trillion have been restructured”. Most likely SPU-loan restructuring will happen through a
centralised scheme coordinated by the Government of India (GoI). “Furthermore, inability to raise
adequate equity in a timely manner is straining the balance sheets and financial flexibility of
developers in infrastructure and construction sectors, resulting in an increased likelihood of
restructuring”, adds Mr. Agrawal. Other vulnerable sectors include iron and steel, textiles, and

The proportion of restructured loans in this period will be high at around 5.7 per cent of banks’
advances as on March 31, 2013. Adds Mr. Agrawal, “Around Rs.0.50 trillion of these
restructured loans may slip into NPAs, though this will depend on the terms of restructuring
and fundamental viability of the projects and the companies. These slippages can aggravate
the already stressed asset quality of banks by further increasing NPAs by 50 to 75 basis
points beyond March 2013.” The loans to SPUs are unlikely to slip into NPAs, given the support
expected from state and central governments.

Despite continued weak growth and profitability in the corporate sector, the large restructuring will
help limit the increase in the banks’ NPAs in the near term. According to CRISIL’s estimates, the
lower GDP growth of 5.5 per cent expected in 2012-13 may result in increase in banks’ gross NPAs
to 3.5 per cent by end-March 2013 from around 3.0 per cent at the end of June 2012. The increase
will be driven largely by delinquencies in the micro, small and medium enterprises, and agriculture
and allied sectors.

Says Mr. Suman Chowdhury, Director, CRISIL Ratings, “The banks have sought to arrest the
deterioration in asset quality through measures such as strong senior management focus on
recovery, setting up dedicated teams for collections, and tightening of underwriting norms.
While the banks’ adequate capitalisation, expected support from GoI for public-sector banks,
and stable resource profiles will continue to support their credit risk profiles, any significant
and sustained deterioration in asset quality and earnings may lead to weakening in the banks’
credit quality.”

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