Monday, July 23, 2012

Banks Save Provisioning Only By Restructuring of Bad Loans

India restructured loan proposal would boost transparency: Fitch

(The following statement was released by the rating agency) 

The Reserve Bank of India's (RBI) proposals for the treatment of restructured loans would increase transparency and be positive for the Indian banking system, Fitch Ratings says. The regulator has recommended increased loan-loss provisions and ultimately ending forbearance on asset classification, and instead recognizing these stressed assets as non-performing in line with internationally accepted practices. 

Treating restructured loans as non-performing would help report the real credit cost of Indian banks, and encourage them to price the risk into these loans more accurately. The proposal is timely, as banks may end up restructuring more loans in two years - FY12 (ending March 2012) and FY13 - than they had in the last 10 years, due to the slowdown in economic growth and single-name concentration in the struggling aviation and state power utility sectors. 

A large proportion of restructured loans are to state-owned companies in sectors undergoing structural reform. State ownership and government involvement reduces the loss expectation in these loans; however, earlier classification as non-performing may encourage banks to take a harder look at their risk profiles and step up monitoring. It could also encourage the government to provide more timely support to these entities to avoid any credit squeeze in the event these accounts become non-performing. 

Applying the proposal to past performance shows higher spikes in credit costs at times of economic slowdown. Fitch's calculations indicate that the credit cost to Indian banks would have been higher at 1.4% of loans (up from the reported 0.9% of loans) in FY10 and FY12 - two years that saw a jump in restructured loans. Correspondingly, ROA would have been lower in these years at around 0.8%, compared with the reported 1.0%. 

Fitch's through-the-cycle approach in rating Indian banks adjusts for restructured loans when evaluating asset quality. For example, the average ROA for Indian banks adjusted for restructured loans between FY07 and FY12 was closer to Fitch's base case of 0.9% than the reported 1.05%. 

The impact is more pronounced in government banks that have a larger share of stressed assets. The growing single-name and sector concentrations in some of these banks, together with funding pressures from rapid loan growth, puts pressure on the Viability Rating or standalone creditworthiness of these banks. As a result, their long-term ratings are already at - or close to - their Support Rating Floors. 

The pressure on Viability Ratings may ease if the funding and asset-quality challenges are addressed. Greater transparency in restructured loans may encourage banks to try and resolve the stresses in their loan portfolios.

The proposals were made by a working group that is examining prudential guidelines on restructured loans, and the RBI has invited comments by August 21. The proposal on asset classification may not be enacted for another two years. In the meantime, the working group has recommended increasing the provision requirements on restructured loans to 5%, from the current 2%. 

Longer debt recast line likely
New rules likely to force promoters for sale of assets and businesses to salvage company
Abhijit Lele / Mumbai Jul 24, 2012, 00:41 IST

Within the next two years, the number of cases referred for debt restructuring might go up substantially, with the Reserve Bank of India proposing a tougher regulatory regime in this regard by mid-2014, experts said.

A senior executive with the Indian Banks’ Association said it was possible that banks would see a rush of proposals before the end of the presently more lenient regime. That would also increase the provisioning burden. He said IBA was yet to finalise views on the proposed regime.

 Even without the new rules, said the official, reference activity for debt recast would stay elevated this financial year due to the economic slowdown or recession in some parts of the world. N Takkar, chief executive of rating agency Icra, said the business environment was stressful. The number of recast cases would grow in the interim before strict norms kicked in after two years, he said.

The stretched economic slowdown, and the effects of high input and interest costs continue to drive companies into a debt recast. The amount of loans referred for the corporate debt restructuring (CDR) process grew almost four-fold to Rs 19,500 crore in April-June 2012 from Rs 4,680 crore in the same quarter of 2011-12.

An RBI panel has suggested raising the provision from two to five per cent over two years for restructured stock, to recognise the inherent risk on these. For fresh restructuring, the revised norms would apply with immediate effect. This would put a strain on public sector banks (PSBs), already under the burden of non-performing assets and portfolios of restructured loans. There could be a five-10 per cent hit on the bottom line of PSBs, according to a report by broking house Edelweiss Securities.

Bank books                                                                                  (Rs crore)
March 2009March 2010March 2011
Gross advances27,93,57232,71,89640,12,079
Standard advances27,25,35031,90,08039,17,991
(of which restructured)60,37997,8341,06,859
Gross NPA68,22281,81694,088
Gross NPA as % of gross advances2.442.52.35
Restructured standardadvances as % of gross advances 2.22.992.66

A Standard Chartered Securities report said banks would be hit but the recast would increase discipline among the lenders, while restructuring loans. Concurring with this aspect on discipline, Icra’s Takkar said the flexibility to recast debt will be severely restricted, perhaps nudging banks to declare stressed accounts as non-performing loans.
In CDR, banks restructure loans in consultation with the companies concerned. Also, there are sectoral packages being worked out, as with textiles (Rs 36,000 crore) and state-owned power distribution companies. Other susceptible sectors include aviation, construction, engineering, steel, and telecom infrastructure.

CRISIL expects the amount of loans likely to be restructured by banks over 2011-12 and 2012-13 at nearly Rs 200,000 crore. A sizable proportion of the restructuring comprises large-ticket corporate exposures; total restructured loans will account for 3.5 per cent of the total advances as at March 2013. Further, banks’ gross NPAs are set to increase to 3.2 per cent by March 2013, from 2.9 per cent as of December 2011.

Another fallout would be giving a further push to the restructure of businesses, to salvage the company in question. Anuj Jain, sector head, banking, with CARE, said the tougher norms will make promoters of companies consider other options including hiving off a business or infusion of equity by a third party. 

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