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Saturday, March 23, 2013
Not Easy To Recover Bad Loans And Contain Rise in NPA
Road to loan recovery tough for banks
Many firms' debt far exceeds their market cap----Business Standard
Bankers have a reason to worry. Nearly two-thirds of all corporate borrowings are by companies whose stock prices are languishing at multi-year lows.
Finance Minister P Chidambaram recently asked public sector banks to get tough on wilful defaulters, saying: “We cannot have an affluent promoter and a sick company.” However, banks would find it tough to recover their dues even if they resorted to selling the shares pledged with them.
Worse still, the gap between outstanding liabilities of these companies and their market value of assets has been growing over the past few quarters. So, banks could recover only a fraction of their dues, even if they went for wholesale selling of pledged promoter shares. (TEN MOST INDEBTED CORPORATE HOUSES*)
A BS Research Bureau analysis of 2,800 listed companies shows 1,200 firms account for nearly two-thirds of the total loans given to the corporate sector. The current market capitalisation of all of these companies is far less than their liabilities.
The ten most indebted groups (in terms of the gap between market value and borrowings) account for 21.6 per cent of the total borrowings by all listed non-financial private-sector firms. However, the market capitalisation of these ten put together is only five per cent of the combined market cap of all private-sector firms (see table). The BS analysis excludes Indian subsidiaries of MNCs.
In the private sector, the combined market cap of 174 business groups is lower than their consolidated debt. These include the names such Adani Group, Jaypee Group, GMR, GVK, ADAG and Videocon.
Interestingly, the market cap of Vijay Mallya-owned UB Group is higher than its liability, mainly due to a sharp rally seen over the past 12 months in the share price of the group’s flagship United Spirits. At its current stock price, UB Group’s total market capitalisation stands at nearly twice its consolidated borrowings of around Rs 23,000 crore (at the end of 2011-12). This could offer banks a chance to recover their dues.
The phenomenon of debt being higher than market cap is not unique to the private sector. Among the public-sector companies, loans of large ones like Indian Oil Corporation, BPCL, HPCL, MTNL, Power Grid Corporation, MMTC and Shipping Corporation of India are higher than their respective market caps. However, these companies are less likely to default on their loans.
The total borrowings of the 1,200 companies analysed, at Rs 16.2 lakh crore as of the end of March 2012, account for 67.2 per cent of the total corporate borrowings in India. There are worries that if the economy does not recover soon, a number of these loans might either turn into non-performing assets or go for restructuring. Obviously, the market sees this looming threat over the banking sector. No wonder, banking stocks have been getting a drubbing for some time.
Bengal govt to bring new legislation to curb chit funds
The bill, which proposes a life term for convicts, however, is still awaiting Presidential assent since January 2010
In an effort to control the proliferation of chit funds, the West Bengal government is planning to introduce a new legislation to crackdown on such companies and ponzi schemes.
The new legislation will be an updated and stronger version of the West Bengal Protection of Interest of Depositors in Financial Institutions Bill, passed unanimously on December 23, 2009.
The Bill, which proposes a life term for convicts, however, is still awaiting Presidential assent since January 2010.
“The earlier Bill was prepared in 2008. The entire base of collecting money and investing money has changed drastically since 2008. The state government is trying to recast the Bill. The new Bill will have more teeth, so that there could be a proper regulation,” West Bengal finance secretary HK Dwivedi said.
“Right now, economic offences wing of state finance department are pursuing all the complaints. The state will go hand in hand with the Centre on the issue. Also, steps are being take to create awareness in small towns and rural areas about risk involved in the promise of high returns,” he added, while speaking at an investor awareness programme of the ministry of corporate affairs.
Later speaking on the issue, “The Centre is looking into the issue, we would also encourage state governments to take necessary action against these firms. These firms are currently misusing the loopholes in law. If state starts taking action, Centre is ready to provide all kind of assistance,” Minister of Corporate Affairs Sachn Pailot said during the event later.
Incidentally, Reserve Bank of India had earlier directed the government to take action againsst mushrooming chit funds in the state. Opposition too have been mounting pressure on Trinamool-Congress government on the issue.
Leader of Opposition Suryakanta Mishra, had recently alleged that some multi-level marketing companies siphoned off about Rs 15,000-16,000 crore from the people in the state in the past few years and have invested in real estate and media organisations.
Also, small saving collections in the state have lost the edge to high-yielding saving instruments like chit funds. According to Gautam Deb, leader of CPI(M), the small savings and post office collections in West Bengal during the April-October period were merely Rs 194 crore, against the targeted amount of Rs 8,370 crore.
Wind power projects face hurdles in getting bank finance
The government wants the public sector banks (PSBs) to consider a separate exposure limit for credit to renewable energy projects to improve fund flow into this capital-intensive industry.
The finance ministry took this issue up with the chiefs of state-run lenders in a meeting held in Delhi on March 18, said a top PSB executive, requesting anonymity.
Loans to the power sector have seen consistent growth, but banks traditionally give preference to conventional power projects rather than renewable energy units. Banks' exposure to the power sector rose to Rs 4.07 lakh crore in January 2013 from Rs 3.28 lakh crore in March 2012, according to the Reserve Bank of India (RBI).
Considering the importance of promoting renewable energy sources, banks could consider carving out a separate sectoral exposure limit. This, according to the finance ministry, could be either through prescribing an independent exposure limit, or having a sub-limit within the exposure limit for the power sector.
Banks prefer financing conventional power projects due to their large size and financing requirements, but this has led to crowding out of finance for the renewable energy sector, feels the finance ministry.
The investment requirement for the renewable energy sector for the next five years has been projected at around Rs 3 lakh crore and over 90 per cent of it is expected to come from the private sector.
According to the finance ministry, renewable energy production is a capital-intensive business. The risks involved are high and the viability of the project is dependent upon factors such as regulatory support and technology trends. Banks charge higher interest rate for loans to the industry due to high perceived risks.
With the smaller project size, tapping overseas markets for funds is not an attractive option for renewable energy companies, according to another bank executive. Moreover, the financial distress faced by state power distribution companies (discoms) pose offtake risk (beyond the renewable purchase obligation) and repayment risk for such projects.
In recent times, bankability in the solar segment has emerged as a major issue mainly due to aggressive bidding for projects. This has raised concerns about the viability of such projects. Further, in many states, evacuation infrastructure for renewable energy projects is not available, the official added.