The worsening financial health of state electricity boards (SEBs) was expected to put huge pressure on the asset quality of banks amid a surge in loan restructuring, credit rating agency CRISIL said on Thursday.
The rating agency has revised its loan recast estimate sharply, which is now pegged at Rs 3.25 lakh crore for 2012-13, up from Rs 2.18 lakh crore in 2011-12. Restructured loans are estimated to rise to 5.7 per cent of gross advances in the current financial year, as compared to 4.68 per cent in the previous year.
Public sector lenders will be the worst affected. “Eighty per cent of restructuring would be in the books of public sector banks," said Pawan Agrawal, senior director, CRISIL.
Reserve Bank of India data show restructured accounts have growth at a compounded annual growth rate of 47.86 per cent in public sector banks as against a credit growth rate of 19.57 per cent between 2009-10 and 2011-12.
Apart from state utility boards, construction companies and the infrastructure sector will add to banks' woes. Of the Rs 1.6 lakh-crore restructured loans till the first quarter of this financial year, SEBs, construction and infrastructure contributed Rs 1 lakh crore while Rs 20,000 crore came from the aviation sector. Loans to troubled national carrier Air India have already been restructured by the banks, while the loans to Kingfisher Airlines have become NPAs despite having been recast.
So far, Rs 60,000 crore of SEB loans have been restructured, according to the CRISIL report released on Thursday.
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“SEBs’ restructuring would amount to Rs 1.5 lakh crore primarily due to the finance ministry’s diktat to public sector banks banning short-term unsecured loans. Owing to this, power utilities are facing difficulties in refinancing old loans,” Agrawal said.
Other sectors such as iron and steel, textiles and engineering were vulnerable to restructuring, the report said. The provisioning requirement of banks increases five times to two per cent in case a standard advance is restructured. In case the loan has already become sub-standard, its asset classification slips further after restructuring, implying higher provisioning for the lender.
“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”, added Agrawal.
There is also a risk of Rs 50,000 crore of restructured assets turning NPAs, which will increase the banking system's NPAs by 50-75 basis points beyond March-2013, CRISIL has warned. However, the loans of SEBs are unlikely to turn bad as they are backed by the state and central governments.
However, this loan restructuring could prove a silver lining, as it would help limit the increase in bank NPAs. The banking industry’s average NPAs would rise by around 50 bps to 3.5 per cent from three per cent in the June quarter, CRISIL said. “These delinquencies would largely come from the MSME, agriculture and allied sectors,” CRISIL added.