Indian Companies – Rising NPA

When the new financial year come up, part of the Indian corporate is fully energized to restructure their loan/debt portfolio. Yes this is the prime time for the Indian corporate to go for restructuring their huge outstanding loan books and increasing the debt of the bank which is the tax earning money of the government.

HISTORIC HEIGHTS OF CDR PERFORMANCE

Before I open up the chamber of corporate rejigment activities of loan restructuring I would like to accentuate the historic details of the Corporate Debt Restructuring Cell (CDR) segment of RBI. This was formed in 2001 to help the Indian companies to reduce the burden of the debts on the company by decreasing the rates paid and increasing the time the company has to pay the obligation back. Well how much debt it was able to reduce will be clear from the historic data of CDR of RBI.

• In between 2001 and 2005, the CDR Cell restructured 138 cases with an aggregate debt of over Rs 75,000 crore.

• Of these, 75% of the cases were a success – they performed well and met their debt obligations in time.1 The total references received by the cell at the end of December 2009 stood at 208 with an aggregate of Rs 90,888 crores.

• Of these, 29 cases totaling Rs 5,018 crores were rejected and 173 cases with a total debt of Rs 84,510 crores were implemented under the program.

• While in the year 2008-09 alone the CDR Cell in India received proposals from 34 companies,3 the number of cases received for restructuring tripled in the year 2009-10.

• These proposals came from all quarters of the industry.

HORSCOPE OF FISCAL 2012 OF CDR

Banks have taken a huge re-balance on its books due to rising debt restricting. In the year of 2011-12 financial year we find Corporate Debt Restructuring Cell (CDR) in fiscal year 2012 was the highest since the forum was launched in 2001, according to data obtained from a CDR source. The number of CDR cases jumped to 84 during the year, compared with 49 a year earlier. Indian banks sought to restructure USD 12 billion in corporate loans in the fiscal year that ended in March, up 156% from a year earlier. Since the inception of the CDR cell in 2001, close to Rs 1.50 lakh crore involving 292 companies have been restructured. Reflecting the stress in the economy, net non-performing assets (NPAs) of banks at the aggregate level rose by 53.5% during the quarter ended March 2012, from about Rs 39,200 crore at the end of March 2011 to slightly over Rs 60,100 crore at the end of March 2012.

Further it has been reaffirmed by CRISIL report that Restructured Loan portfolio of banks is expected to touch Rs 2 trillion by March 2013. Bank’s gross NPAs are set to increase to 3.2% of advances by March 2013, from 2.9% as at December 2011. This also raises the questions on the ratings of these companies who are engaged in debt restructuring. The large quantum of restructuring reflects the prevailing stress on corporate India’s credit quality because of lower profitability, weak demand, and tight liquidity. I find we are pretty much travelling in the same Path as western economies financial system travelled. Its not the question that we are pretty much well governed and well capitalized. Every penny lost from the banking books is an loss to the opportunity of growth of Indian companies. This reflects the corporate management styles of financial management being adopted and followed by the Indian industries.

WARNING OF THE GOVERNMENT

One of the prominent avenues being adopted by the companies to restructure their debt is to provide quasi-securities like convertible preference shares that have a long tenure, low returns and high provisioning. Later on these are converted into equity. Now if the equity market performance is not well enough to make the conversion profitable then banks will be asked to write-off the debt hence increasing the NPA.

In a letter to the corporate debt restructuring (CDR) cell , a forum where corporates and banks come together to restructure bad loans, late last month, the finance ministry has specifically warned banks against taking these on their books. Government has been forced to interfere since RBI failed to manage the same.

Bankers has also admitted that lending institutions have suffered losses in the past one year for agreeing to convert distressed loans into cumulative convertible preference shares (CCPS) or other quasi-equity securities. Recently, 25% of Rs 16,200-crore loans to telecom tower operator GTL were converted into low yielding compulsorily convertible debentures (CCD) while 20% of Rs2,000-crore loans to 3i Infotech were converted into CCPS. On account of this conversion, banks had to make substantial provisioning (or setting aside funds out of profits to cushion the loss of income). What has alarmed the ministry is the surge in the number of such cases.

The ministry has also advised banks that loans should not be restructured to bail out companies with incompetent management. Well governance and issues related to management needs to be placed on the table. As a global business strategic analyst I find bankers should be given space as an Independent Director of the company to look into the management process of the business. If the board finds things are not well enough alarm bell should rang for danger.

INDUSTRIES KEEPS ON ADDING FEATHERS.

Well the above solution is much of debate and less to implement the danger for the Indian banks are crouching forward. Companies are struggling to compile with the debt terms and at such time the government become stringent. Corporate whose managements have “diverted” funds or are perceived as “incompetent” will have a hard time persuading banks to rejig debt and throw in a lifeline. Delay and lack of policy reforms derails the growth opportunities of Indian companies who were promised by the Government about a golden decade of growth of economy at 8%.This debt structuring is the leverage death being gifted by the government. I doubt that even if the policies come up will the Indian economy will be able to steer out of the death phase.

The new feather in the cap is The Kingfisher Airlines, whose NPA tolled over Rs 15,000 crore. Well how banks will come over the rising debt of NPA is a matter of hard thinking and brain storming at the same time management polices needs a relook.