MORE PAIN FOR INDIAN BANKS AHEAD

CRISIL believes that loans restructured by Indian banks may increase sharply to Rs.3.25 lakh crore between 2011-12 and 2012-13, against the earlier estimate of Rs.2 lakh crore. Loans of Rs.1.6 lakh crore have already been restructured in 2011-12 and in the first quarter of 2012-13. The majority of restructuring will be in loans to the state power utilities (SPUs), and the construction and infrastructure sectors. The rise is a result of significantly higher funding challenges being faced by companies with large debt.

In recent months, availability of unsecured short-term loans from Indian banks has diminished. This is exacerbating refinancing and liquidity pressure, especially for the SPUs. This will lead to a significant increase in restructuring of SPU loans to nearly Rs.1.5 trillion. So far, SPU loans of Rs.0.6 lakh crore have been restructured. Furthermore, inability to raise adequate equity in a timely manner is straining the balance sheets and financial flexibility of developers in infrastructure and construction sectors, resulting in an increased likelihood of restructuring. Other vulnerable sectors include iron and steel, textiles, and engineering.

The proportion of restructured loans in this period will be high at around 5.7 per cent of banks’ advances as on March 31, 2013 according to CRISIL. Around Rs.0.50 lakh crore of these restructured loans may slip into NPAs, though this will depend on the terms of restructuring and fundamental viability of the projects and the companies. These slippages can aggravate the already stressed asset quality of banks by further increasing NPAs by 50 to 75 basis
points beyond March 2013. The loans to SPUs are unlikely to slip into NPAs, given the support expected from state and central governments.

Despite continued weak growth and profitability in the corporate sector, the large restructuring will help limit the increase in the banks’ NPAs in the near term. According to CRISIL’s estimates, the lower GDP growth of 5.5 per cent expected in 2012-13 may result in increase in banks’ gross NPAs to 3.5 per cent by end-March 2013 from around 3.0 per cent at the end of June 2012. The increase will be driven largely by delinquencies in the micro, small and medium enterprises, and agriculture and allied sectors.