Surge in corporate debt restructuring can spike in banks' NPAs
The surge in corporate debt restructuring could be masking a spike in banks' non-performing assets.
Print Edition: Jul 22, 2012
In September 2011, D.P. Kohli and B.S. Sawhney, promoters of the cash-strapped Koutons Retail, had plenty to smile about. A consortium of banks led by the Chennai-headquartered Indian Overseas Bank had given its assent to a Rs 600 crore debt restructuring of the company. This was at a time when other discount retail chains such as Vishal Retail and Subhiksha Retail were down and out.
Restructuring, a common practice globally, provides relief to distressed borrowers by extending loan tenures, putting interest payments on hold, converting debt into equity, issuing fresh term or working capital loans, and so on. In Koutons' case, the restructuring involved a moratorium on interest payments for two years and extension of the loan period, giving the Delhi-headquartered retailer a much-needed breather. But the excitement was shortlived. While the restructuring went ahead, some banks that were part of the consortium refused to make immediate interest concessions.
A peek beneath the surface reveals that Koutons Retail is again in danger of turning into a non-performing asset (NPA). Its losses have risen to over Rs 500 crore in the last two years. The promoters' stake has been reduced from nearly 70 per cent five years ago to around 11 per cent by March 2012. Auditors are seeking information on the accounts and operational details of 600 of its 900 stores. In April, the National Stock Exchange suspended trading in its stock for noncompliance with provisions of the listing agreement.
Koutons' share price, which crossed the Rs 1,000 mark in February 2008, is languishing at around Rs 8 today. Its market capitalisation has shrunk from Rs 3,000 crore in 2008 to Rs 20 crore now.
Given this sorry state, it is hard to comprehend why the consortium of banks agreed to restructure the debt of a company on the verge of a collapse. The Koutons fiasco actually points at a bigger malaise. "The purpose of a CDR (corporate debt restructuring) is to provide a helping hand to promoters of fundamentally viable businesses," says the chairman of a public sector bank. But the sudden spurt in restructuring cases suggests that many Indian banks are desperate to restructure assets in order to avoid NPAS. If an asset is declared to be non-performing, it forces the bank to increase provisioning and lowers profits in its books. "This temporary relief is actually hiding potential NPAS in the banking sector," says an analyst with the brokerage division of a large domestic bank.
Analysts say the statistics reveal a worrying trend. The number of restructuring exercises approved by banks has jumped from nine in 2009/10 to 41 in 2011/12. Restructured debt has jumped from Rs 4,200 crore to a staggering Rs 35,000 crore over the same period (see Restructuring Approvals). Credit rating agency CRISIL estimates that banks' NPAs will rise from around 2.3 per cent in 2009/10 to 3.2 per cent by 2012/13, crossing the Rs 2 trillion mark (one trillion equals 100,000 crore). "A ratio below one per cent is considered ideal. The NPAS could rise to 3.5 per cent if the economic environment weakens further," says Suman Chowdhury, CRISIL'S director for financial sector ratings. The Reserve Bank of India (RBI) fears a further deterioration. In its fifth financial stability report, released on June 28, the RBI says bad loans could rise to 4.6 per cent in a severe risk scenario.
Recovery of any debt is directly linked to the economic environment, and the prevailing climate is far from conducive for that. The slowdown has hit just about every sector hard. Retail is being forced to come to terms with the mindless expansion and overleveraging of the boom period. Telecom is caught in a web of falling tariffs, scams and high spectrum costs, while high crude oil prices have compounded the aviation sector's woes. The story is pretty much the same in real estate, engineering, infrastructure, steel and textiles.
When BT quizzed State Bank of India Chairman Pratip Chaudhuri at a banking seminar recently, he offered a historical perspective. "Of the total restructured book, 18-20 per cent (generally) turns into NPAS. But every NPA doesn't translate into a loss. Our loss experience is 4-5 per cent of the book." Punjab National Bank, which had restructured assets worth Rs 29,828 crore as of March 2012, saw 8.79 per cent of them turned into NPAS.
There are instances of companies successfully using corporate debt restructuring to emerge from precarious financial situations. Essar Steel, flagship of the Ruia family's Essar Group, did so in 2006. But many say that happened because of a turnaround in the commodity cycle - steel prices in Essar's case - in the early 2000 period.
This time around, with the world economy in a crisis, borrowers are unlikely to enjoy such good fortune.
A peek beneath the surface reveals that Koutons Retail is again in danger of turning into a non-performing asset (NPA). Its losses have risen to over Rs 500 crore in the last two years. The promoters' stake has been reduced from nearly 70 per cent five years ago to around 11 per cent by March 2012. Auditors are seeking information on the accounts and operational details of 600 of its 900 stores. In April, the National Stock Exchange suspended trading in its stock for noncompliance with provisions of the listing agreement.
Koutons' share price, which crossed the Rs 1,000 mark in February 2008, is languishing at around Rs 8 today. Its market capitalisation has shrunk from Rs 3,000 crore in 2008 to Rs 20 crore now.
Given this sorry state, it is hard to comprehend why the consortium of banks agreed to restructure the debt of a company on the verge of a collapse. The Koutons fiasco actually points at a bigger malaise. "The purpose of a CDR (corporate debt restructuring) is to provide a helping hand to promoters of fundamentally viable businesses," says the chairman of a public sector bank. But the sudden spurt in restructuring cases suggests that many Indian banks are desperate to restructure assets in order to avoid NPAS. If an asset is declared to be non-performing, it forces the bank to increase provisioning and lowers profits in its books. "This temporary relief is actually hiding potential NPAS in the banking sector," says an analyst with the brokerage division of a large domestic bank.
Recovery of any debt is directly linked to the economic environment, and the prevailing climate is far from conducive for that. The slowdown has hit just about every sector hard. Retail is being forced to come to terms with the mindless expansion and overleveraging of the boom period. Telecom is caught in a web of falling tariffs, scams and high spectrum costs, while high crude oil prices have compounded the aviation sector's woes. The story is pretty much the same in real estate, engineering, infrastructure, steel and textiles.
When BT quizzed State Bank of India Chairman Pratip Chaudhuri at a banking seminar recently, he offered a historical perspective. "Of the total restructured book, 18-20 per cent (generally) turns into NPAS. But every NPA doesn't translate into a loss. Our loss experience is 4-5 per cent of the book." Punjab National Bank, which had restructured assets worth Rs 29,828 crore as of March 2012, saw 8.79 per cent of them turned into NPAS.
There are instances of companies successfully using corporate debt restructuring to emerge from precarious financial situations. Essar Steel, flagship of the Ruia family's Essar Group, did so in 2006. But many say that happened because of a turnaround in the commodity cycle - steel prices in Essar's case - in the early 2000 period.
This time around, with the world economy in a crisis, borrowers are unlikely to enjoy such good fortune.
