PAY­ING FOR PAST SINS: BANKS IN FOR LONG PE­RIOD OF PAIN

De­spite tighter norms, banks ap­pear rec­on­ciled to re­cast, a fall­out of reck­less lend­ing in the boom years. What’s wor­ry­ing is the sig­nif­i­cantly larger amounts in­volved

The Financial Express - - FRONT PAGE - VISHWANATH NAIR

IT’S been an un­usu­ally busy year for the cor­po­rate debt re­struc­tur­ing (CDR) cell, the team that meets to de­cide whether cus­tomers should be al­lowed eas­ier re­pay­ment ter ms be­cause their busi­nesses are in trou­ble. Few in the bank­ing fra­ter­nity would have guessed they would be in so much trou­ble be­fore the year was out, fewer would have be­lieved the num­bers: As much as R58,862 crore of loans re­struc­tured be­tween April and De­cem­ber, on the back of R 76,479 crore re­cast in 2012-13. And this de­spite tighter nor ms for re­struc­tured loans in the for m of higher pro­vi­sion­ing that makes it far more ex­pen­sive for banks to re­cast debt.

A few years back, a meet­ing at the CDR cell could be wrapped up in a cou­ple of hours, but, th­ese days, they drag on and even the lunch break is a hur­ried one. As one banker, who has been a part of th­ese con­gre­ga­tions for sev­eral years, con­fir ms, at times, it’s nine at night and no de­ci­sion is in sight. In the good old days, he re­calls, a meet­ing would be called once a month, but, now, with a flurry of re­quests for re­casts, even two sit­tings a months aren’t enough to take care of the load. In Oc­to­ber alone, cases worth over R22,000 crore were re­ferred to the cell, the high­est ever in a month.

It’s not that there are many more re­quests to be looked at — the run rate of 32 a quar­ter in 2012-13 has fallen off to 24 a quar­ter in 2013-14. What is caus­ing bankers to spend longer hours por­ing over pro­pos­als are the sig­nif­i­cantly larger amounts that bor­row­ers want re­struc­tured.

In 2012-13, for in­stance, re­quests worth R91,225 crore had piled up, but at R95,528 crore in the nine months to De­cem­ber 2013, it looks like the quan­tum of re­quests will be far higher this year. Of the 10 largest re­casts, five have hap­pened in 2013.

Bankers blame the poor state of the econ­omy for the mess the in­dus­try is in. And with the data not sug­gest­ing a re­cov­ery any­time soon, they’re not sure the re­vival plans are go­ing to work. How­ever, the tighter nor ms for re­cast loans have forced lenders to be strict with pro­mot­ers; they now in­sist the pro­mot­ers cough up their fair share of the sac­ri­fice and dis­miss re­quests if they don’t com­ply with the rules. They are also in­sist­ing on a per­sonal guar­an­tee, now com­pul­sory af­ter the Re­serve Bank of In­dia (RBI) ap­proved the Ma­ha­p­a­tra Com­mit­tee’s guide­lines ear­lier this year.

Bankers are also ask­ing for more foren­sic au­dits to check for mis­use or mis­ap­pro­pri­a­tion of funds and Win­some Di­a­monds is among the re­quests that banks tur ned down be­cause the com­pany failed to gen­er­ate the nec­es­sary cap­i­tal it needed to.

But de­spite the crit­i­cism by the reg­u­la­tor of the largescale re­struc­tur­ing — deputy gover nor KC Chakrabarty, in par­tic­u­lar, has been vo­cal about how bankers have given in too eas­ily, go­ing to the ex­tent of say­ing loans are be­ing ev­er­greened — banks re­main rec­on­ciled to re­struc­tur­ing. Lanco In­frat­ech’s R7,500 - crore pack­age was not just ap­proved, the com­pany also man­aged to get an ad­di­tional fund­ing of R3,200 crore.

In their can­did mo­ments, bankers con­cede they are pay­ing for their sins com­mit­ted in the boom years of 2009-2010, 2010-11 and 2011-12, when they lent, if not reck­lessly, then cer­tainly over-zeal­ously. They recog­nise that they are in for a long pe­riod of pain as a large num­ber of in­fra­struc­ture com­pa­nies — power plants, for in­stance — have been stalled be­cause of the lack of fuel link­ages, which aren’t ex­pected to come through im­me­di­ately.

Bankers re­alise it’s go­ing to be a cou­ple of years be­fore cash flows at th­ese com­pa­nies ease and they are able to ser- vice their loans reg­u­larly. They ac­knowl­edge they have been way too le­nient in the past, not as­tute enough in their ap­praisals and sub­mis­sive when they should have been pushy.

The big­ger worry is that the prob­lem is spread­ing; from the iron and steel and power sec­tors, it’s slowly mov­ing to spa­ces such as engineering and con­struc­tion. Right now, iron and steel com­pa­nies are the big­gest ben­e­fi­cia­ries of re­casts — they ac­count for more than 21.3% of the re­cast loans, but at 18.1%, EPC fir ms have also seen a big chunk of loans be­ing re­worked.

In their de­fence, how­ever, they point out that 2013 has been a dif­fi­cult time for their cus­tomers — the econ­omy fell deeper into a trough, the bot­tom seemed to have fallen out of the cur­rency and money was hor­ri­bly ex­pen­sive. They cite gen­uine in­stances of busi­nesses be­ing in trou­ble for no real fault of the pro­moter and, they be­lieve, the right thing to do un­der the cir­cum­stances is to hand-hold cus­tomers and help them out, es­pe­cially smaller en­ter­prises.

Bankers agree they are averse to shut­ting down com­pa­nies and that they don’t be­lieve that’s the way out; most are con­vinced it’s worth­while giv­ing the pro­moter a chance to tur n around the busi­ness. Which is why even big-ticket cases like that of Gam­mon In­dia have gone through; bankers have okayed a R13,500crore re­cast at in­ter­est rates that are lower by about 100-200 bps and with a re­pay­ment pe­riod stretch­ing to 10 years, with a two-year mora­to­rium on in­ter­est thrown in.

Hope­fully, the new mech­a­nism sug­gested by the RBI, by which stress can be de­tected early and more in­for ma­tion shared be­tween banks, will help ease the prob­lem of toxic loans. The cen­tral bank is will­ing to in­cen­tivise banks to re­solve is­sues quickly and fa­cil­i­tate lev­er­aged buy­outs of stressed com­pa­nies. Prob­a­bly the best thing that can hap­pen to banks is the in­de­pen­dent eval­u­a­tion of CDR cases; a lit­tle dis­tance from their cus­tomers can’t hurt.

ILLUSTRATION: SHYAM

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