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
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.