Research agency CRISIL warned that Indian banks may be forced to restructure a larger proportion of their outstanding corporate debt than initially expected, due to the drying up of short-term credit.
It issued the warning as it hiked its estimate for the amount of loans likely to be restructured in the remainder of this year sharply up.
Restructuring refers to the renegotiation and the subsequent easing of loan conditions, usually by the lender, to help the creditor tide over financial difficulties and prevent a default.
“Loans of Rs.1.6 trillion have already been restructured in 2011-12 and in the first quarter of 2012-13,” it said.
As a result, it raised the two-year estimate by about two-thirds. “Loans restructured by Indian banks may increase sharply to Rs.3.25 trillion between 2011-12 and 2012-13, against the earlier estimate of Rs.2.0 trillion (issued in April 24, 2012),” it said.
Most of the restructuring will be for public sector units, especially state-government owned power distribution companies.
“In recent months, availability of unsecured short-term loans from Indian banks has diminished. This is exacerbating refinancing and liquidity pressure, especially for the state power units (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,” said Pawan Agrawal, Senior Director, CRISIL Ratings.
The result will be a hit on the asset quality of Indian banks.
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, it said.
“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. 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,” it said.
However, the loans to SPUs are unlikely to slip into non-performing assets, given the support expected from state and central governments, it said.
In addition to the power companies, the 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, Agrawal said. Vulnerable sectors include iron and steel, textiles, and engineering.