Web Analysis: Bad debts return to haunt banks

There's a 48 per cent jump in loans being referred for CDR

“Bank failures are caused by depositors who don’t deposit enough money to cover losses due to mismanagement.”

-- Dan Quayle, vice president of the US, 1989-93

Indian banks definitely will need depositors by the truckload to pull them out of the mess they are in. Financial Express reported that the quantum of loans referred for recast by the corporate debt restructuring (CDR) cell has increased to Rs 2,05,692 crore, a jump of 48 per cent over the previous year. This amount is three times the cumulative net profit of all listed banks in FY11. The total profit of the 41 listed banks was only Rs 66,907 crore.

Of the above mentioned amount coming to the CDR cell, Rs 1,50,225 crore has been approved. Of this, the actual amount of loans restructured is only Rs 39,311 crore, or roughly 20 per cent (6 per cent in the 2010-11) of the loans that have come to the CDR cell. Even this amount is 500 per cent higher than the previous year’s.

A sharp rise in the number of approvals indicates the ground scenario, which is definitely not heartening. The report says that an additional Rs 35,878 crore is under process to be sent to the CDR cell.

A loan is sent for restructuring if the bank feels that the borrower is not in a state of repaying even the interest amount. Had the account not been restructured, it would have resulted in being declared a non-performing loan. The lending bank in turn would have to strike the amount off its loan book and at the same time take a hit on its profit.

An unprecedented global and domestic slowdown has affected almost all sectors of the economy. Banks have to bear the brunt as they are lenders to most of them.

Recognizing the strain, State Bank of India has drastically reduced interest rate for small and medium enterprises (SME). In its December quarter results presentation, the bank has highlighted that NPLs from SMEs are as high as 7.90 per cent of total loans given to the sector. SME loans were second only to agriculture, which had an even higher NPL of 9.45 per cent.

Sending an account to the CDR cell is the absolute last step that a bank takes after failing to recover money by all means. Even after an account is approved by the CDR cell, banking records have shown that nearly one-fourth of them again default on their payments.
Till the economy picks up, banks are likely to be saddled with toxic assets. This time around however, the toxicity has spread deep, threatening to pull down banks along with the companies if growth does not pick up fast.