Sharp jump in debt recast pipeline in third quarter

With the approval rate coming down sharply in FY14, banks are set to report higher slippages in Q3 and Q4

Public sector banks are in for a rough ride in the third and fourth quarters of the current financial year, as cases referred for corporate debt restructuring (CDR) have risen sharply but approvals have nearly halved. If nearly half the cases referred for CDR are not approved, these will have to be classified as non-performing assets (NPAs) and banks will, as a result, have to provide for these slippages.

In the December quarter, 24 cases amounting to Rs 44,800 crore have been referred to the CDR cell. Of these, only 11 cases amounting to Rs 15,600 crore have been approved. The trend is no different if one looks at the financial year so far. In the first three quarters, 82 cases amounting to Rs 1,09,200 crore have been referred for CDR, of which 41 cases, amounting to Rs 58,900 crore, got approval.

This pattern is a deviation from what has been happening so far. In FY13, a total of 130 cases adding up to Rs 91,700 crore were referred, of which 108 cases amounting to Rs 78,500 crore were approved. Given the approval rate has now halved in FY14, banks will have no choice but to declare these assets as impaired loans and provide for them. So long as these cases are pending with a CDR cell, banks need to provide five per cent of the asset. However, if these cases are not approved for CDR, banks will have to either write these off or declare these NPAs. If they lapse in to the NPA basket, banks will have to provide 20 per cent, further eroding profitability.

Analysts believe slippages are unlikely to stabilise in the coming quarters and banks will have to write these off or sell these assets down. Analysts believe the pressure of recapitalisation will only accelerate in the coming quarters.

Not only are the total number of cases increasing but even the size of these cases is on the rise. Credit Suisse says increasing size of loans referred to CDR is a visible trend, with average loan size at Rs 2,200 crore in the third quarter as compared to Rs 1,100 crore in the first half of FY14. Restructured loans currently account for six per cent of system loans and some of the assets restructured two years earlier might also turn bad. Analysts say the recent outperformance of banking stocks and recent reform measures announced by the government are likely to ease the stress of bad loans. But this does not seem likely, as high interest rates are further deepening the down cycle. Analysts expects systemic slippage ratio to inch up to 3.1 per cent in FY14.