NPA problem worsens PDF Print E-mail
Thursday, 23 February 2017 08:05
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Shobhana's edit

Firms with interest cover of under one own 41% of debt

Corporate India has been over-leveraged for several years now, the result of some reckless lending by banks deceived by predictions the Indian economy would grow at 9% or more year after year. Although there have been attempts by business houses to pare debt by selling assets, there has been no improvement at an overall level, and not just because the economy remains sluggish. A recent study by Credit Suisse notes that the proportion of debt with companies that have an interest cover of under one remains high at 41%. Another 35% of the debt is with chronically stressed companies. Among the companies that have borrowed excessively are infrastructure firms, utilities and also producers of metals. With profits not adequate to cover interest costs, many of these companies would have turned defaulters had banks not ever-greened the loans in one way or another. But even after a fair bit of forbearance from the regulator, lenders have needed to set aside large chunks of their profits as provisions for these exposures. Banks have also attempted to resurrect some of the companies which are near bankrupt, but the environment is a hostile one; for instance, although there were two dozen instances where banks attempted to sell the companies through a Strategic Debt Restructuring (SDR), they succeeded only in one case. The upshot of this is that they now need to put away larger amounts as provisions; Credit Suisse estimates the amount at Rs 86,000 crore over the next 12 months. With the government unwilling or unable to capitalise state-owned banks – the outlay in the Indradhanush scheme is just Rs 70,000 crore over four years between F16 and FY19 – the higher provisions will weigh on banks' balance sheets and their ability to lend.


There could be four ways out of this – enhance forbearance, pump in more capital, create a bad bank or facilitate consolidation. Of these, the easiest, but least desirable, would be to allow more forbearance – this amounts to sweeping the dirt under the carpet and helps no one. A bigger dose of capital infusion would help in the short run but doesn’t really resolve the issue – in any case, the government clearly isn't buying the idea; there are reports only Rs 2,000 crore of recapitalization would be provided next fiscal as against the planned Rs 10,000 crore  which was also inadequate. The total stressed assets in the system today – the sum of gross NPAs and restructured loans – are around 12.3% of assets and at least half of this or around Rs 4.5 lakh crore is probably irrecoverable.


This is where RBI deputy governor Viral Acharya has suggested twin initiatives – one purely private for sectors like metals, telecom, EPC and textiles with moderate levels of debt forgiveness and a second state-backed National Asset Management Company (NAMC) for sectors like power where the debt forgiveness is very high and turnarounds are going to take much longer. Even with the right political backing, getting the bad bank to work will take time – in most cases, promoters will have to removed and, in the case of the private venture, Acharya’s plan involves the turnaround case being rated by at least two credit rating agencies. Simultaneously, the government has to facilitate bank consolidation and, though not an ideal way out since weak banks will need to be merged with stronger banks – this will dilute the franchises of the latter – it would over time create stronger institutions.



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