Corporate debt restructuring (CDR), which has already seen a five-fold jump in the first quarter of the financial year, is set to break new records, as the Centre is planning to recommend Rs 2 lakh crore debt of state power utilities to the debt restructuring cell.
In the just concluded quarter, the banking sector has seen the quantum of restructured loans rising over five-fold to Rs 20,040 crore, up from Rs 4,950 crore in the year-ago period, sources at the CDR cell said.
According to the power ministry, the Cabinet is likely to take up a proposal to recast about Rs 2 lakh crore debt of the power distribution companies, whose precarious financials have raised concerns of default in the banking system.
This comes over and above the Rs 30,000 crore CDR that five state-run discoms of Tamil Nadu, Madhya Pradesh, Rajasthan, Punjab and Haryana had availed in the last financial year.
A senior official of a city-based state-run bank expressed surprise at the move saying, “Any more CDRs will have serious repercussions on the banking system, as it comes on the back of an already historic rise in CDR cases due to deepening slowdown in the economy.”
Though he admitted that all CDR cases do not end up in losses for banks, as the historical average of CDRs turning up as losses is only four-five per cent and 18-20 per cent of them become non-performing assets (NPAs), he said the sheer rise in the CDR proposals is itself disconcerting.
“The rising number of NPAs and CDRs can impact our ratings, which are already under strain,” an official of another state-run lender pointed out.
State Bank of India Chairman Pratip Chaudhuri had last week defended the CDR mechanism as “a welcome platform” where the bankers can take a collective call to recover their money at a later date.
“The CDR is a welcome platform where all the banks come together and I would think that it is possibly the nearest approximation to the chapter 11 bankruptcy proceedings in the US where all creditors come on one forum and evaluate their relative positions and the company’s ability to meet all the outstanding restructuring — is a very common practice globally,” Chaudhuri had said.
Power Secretary P Uma Shankar last Friday had said the Ministry had already finalised a CDR proposal for the discoms to tune of Rs 2 lakh crore with a view to provide assistance to them. “It will be an interim financing arrangement (based) on a tight reform path... The Cabinet is likely to take up the proposal in the next 15 to 20 days,” he had said.
About 50 per cent of the debt would be converted into bonds that would be issued by the respective states and the the remaining 50 per cent liabilities will be restructured. Discoms would be provided a three-year payment moratorium. Chaudhuri had also called for discoms going public as a lasting solution to their problems, saying “state-run discoms and generating companies should try to get listed as stock market pressures can help drive professionalism in such companies.”
“Listing will make them more viable and would make them adopt more enlightened and commercial policies.”
Last week, the Reserve Bank of India had warned against the asset quality of banks due to exposure to the power sector. The report said banks have an exposure of nearly Rs 5.5 lakh crore to the over-leveraged power sector, and nearly 12 per cent of this are already restructured as of March-end.
“Potential pressures on asset quality have intensified with restructuring in bank credit to the power sector registering a sharp increase, especially in the last quarter of FY12, even as impairments as a ratio of outstanding credit has moderated,” RBI report noted.
A CRISIL report in March said losses of state-run discoms rose 24 per cent to Rs 27,500 crore between 2006-07 and 2009-10, and warned this might top Rs 35,000-40,000 crore in FY11.
According to the Shunglu panel report released last year, net loss, after subsidies, of 15 discoms, which account for over 90 per cent of power consumption, stood at Rs 27,000 crore in FY10.
Earlier this year, rating agency Icra had projected the losses for discoms, before accounting for government subsidy, at Rs 80,000 crore in FY12, much higher than Rs 63,500 crore seen in FY10.
Over three-fourths of the estimated loss comes from discoms of Uttar Pradesh (UP), Tamil Nadu, Madhya Pradesh, Rajasthan, Punjab and Haryana, out of which, barring UP, all have already gone for CDR in the last financial year worth Rs 30,000 crore.
Last month, the government had recommended Rs 35,000 crore of highly distressed loans of the textile sector, out of the overall Rs 2 lakh crore of banks’ exposure to the struggling sector.
