Resolution of Bad loans may hit banks badly: Crisil

Banks may have to incur significant losses while getting rid of the mammoth bad loans sitting on their books, ratings firm Crisil said.

They will have to sacrifice as much as 60 per cent of the outstanding loans from the top 50 stressed companies that could not repay loans and are fighting insolvency battles, shows a Crisil analysis. That would be a hit of about Rs 2.4 lakh crore as this universe of debtors accounts for about Rs 4 lakh crore of loans.

About a fourth of the stressed loans is from the construction sector, which is roiled by regulatory changes and an uncertain demand scenario, and has been in a slowdown. The metals industry has the highest share of sticky loans at 30 per cent and the power sector, 15 per cent.The rest is segregated among other sectors.

"We used the economic value approach to assess the haircuts," said Pawan Agrawal, the chief analytical officer at Crisil Ratings. "This is a combination of market value multiples and cash flow estimation. The final haircut, however, will also be influenced by the expectation of lenders, valuation of subsidiaries and the price outlook for commodity-linked sectors."

Crisil has segregated the Rs haircut' -the portion of the loan that banks are unlikely to recover -into four categories, suggesting the intensity: marginal, moderate, aggressive and deep.

The analysis shows that 60 per cent of the loans would fall under the Rs aggregate' category to arrive at a sustainable level of debt.

"The intensity of haircut required on these assets is the manifestation of the challenges faced by them in the current business environment," Crisil said in a note. "Many of these assets may not be viable any more."