An increasing number of companies is queuing up for corporate debt restructuring (CDR) this year. In the first nine months of FY12, 59 cases were referred for CDR, compared to 31 in FY10 and 49 in FY11. Nearly Rs 50,000 crore in debt of these 59 companies has been referred to the restructuring cell. Analysts say mid- to small-sized players in iron and steel and textile sectors are deferring payment obligations, leading to CDR referrals.
What does this process of CDR mean for banks? Simply put, these companies are saying they are facing difficulty in repaying, and are therefore appealing for an extension of the loan’s tenure at a different rate. In the aftermath of the Lehman crisis, banks were allowed to restructure assets in FY09 and FY10. This actually helped several companies deal with a difficult financial situation and prevent these accounts from turning into bad loans.
The trend suggests 45 per cent of cases referred to CDR have been successfully revived. In value terms, this is equivalent to 85 per cent of CDR debt being able to meet the obligation, says Nilesh Parikh of Edelweiss Securities, in a note. However, history may not repeat itself again. Anish Tawakley of Barclays Capital is concerned about the high level of loan restructuring being undertaken by banks because he expects their experience with loan restructuring in the current environment to be worse than in FY09 and FY10. First, he believes monetary easing played a key role in easing debt burden and secondly, companies also managed their debt burden by taking unhedged foreign currency liabilities. He says: “Last time around 10 per cent of the restructured loans turned NPAs. This time the experience could be worse. In fact, if we look at SBI (one of the few banks that discloses the performance data for different vintages), we see 35 per cent of the loans restructured in FY11 have slipped into NPAs.” Clearly, banks are deferring the pain to a later date.
Analysts are concerned CDRs create a perverse incentive for borrowers to take risks. Tawakley is of the opinion restructuring standards are lax from an economic perspective and hence, “borrowers can restructure with very little sacrifice, which reduces the discipline that threat of default normally places on the borrower.” If this pattern continues, banks may see a large number of its restructured assets turning into bad loans. There are enough recent examples, where companies have failed despite the benevolence shown by banks, to support this theory.