Strategic debt recast may hit banks' credit growth

Brokerages estimate this could postpone the recognition of non-performing assets worth Rs 1,50,000 crore

The Nifty PSU Bank index comprising public sector banks (PSBs) hit a fresh 22-month low on Tuesday on asset quality concerns and probable losses from the strategic debt restructuring (SDR) scheme announced by the Reserve Bank of India (RBI) in June 2015. Though SDR provides hope to investors of debt-laden entities, experts believe the burden on banks is set to swell. Under SDR, banks can convert their debt to equity and take controlling stake of 51 per cent (or more) in these companies; a move which would vest more power with banks to revive operations of these businesses. As provisioning norms would not be applicable for 18 months on these stressed loans once SDR is invoked, experts believe SDR may just push the problem down the road leading to credit-related issues in FY17-18.

Success of SDR is not clear, given that of the 530 cases received under corporate debt restructuring (CDR), only 190 cases –totalling Rs 70,000 crore – have exited CDR, as loans could not be repaid.

  Religare in its report said the failure of CDR ballooned from 23 per cent in September 2013 to 36 per cent in September last year. Further for SDR to be successful, banks need to find new promoters for the companies within the 18-month window and this would require restoring viability and generating investor interest in such companies. According to a Credit Suisse report, this would require banks to take a significant haircut in debts and this may be tough, as debt to market capitalisation of stressed companies is estimated at 15 to 50 times. Agreeing with this, Abhishek Bhattacharya, associate director, Ind-Ra Ratings feels SDR may not be a viable solution, given today’s state of affairs. “Most of the stressed corporates are highly levered and SDR would only provide a temporary solution."

Analysts at Religare estimate SDR may postpone the recognition of non-performing assets (NPA) worth Rs 1,50,000 crore, given one-fourth of restructured assets under CDR may again be restructured through SDR. SDR has been exercised on loans worth Rs 81,300 crore (mostly in the infrastructure and metals sectors). With RBI directing banks to clean up their books by March 2017, and banks continuing to fund interest and working capital costs during the 18-months period, NPA levels are bound to shoot up.

Secondly, shares acquired by banks through SDR are exempt from RBI’s restrictions on capital market exposures. Experts feel this would dilute business of banks and they consider it a departure from core banking operations, as banks are not in the business of running companies.

To counter this, Bhattacharya suggests banks need to incorporate risk from large stressed corporates by building up adequate capital buffers. Macquarie in its report noted the key issue with PSBs is that existing stressed asset coverage ratio is quite low at 20 per cent and, hence, it expects provisioning to remain high, with the RBI demanding higher provisions on restructured assets and unhedged forex exposures of corporates. Therefore, in the near term, it looks like lenders such as State Bank of India, Punjab National Bank, Bank of Baroda, ICICI Bank and Axis Bank having exposure to SDR may have a bitter pill to swallow. Macquarie has trimmed its earnings forecast by about 30 per cent for PSBs and about 10 per cent for ICICI Bank and Axis Bank.