Banks fear loan default by commodity companies

MUMBAI: After infrastructure firms, it may be the turn of commodity companies to spoil Indian banks’ balance sheets by defaulting on repayments of loans worth at least Rs 14,000 crore in the coming quarters. Bankers estimate that at least a dozen companies that have got their debt restructured will fail to service their loans after being hit by sharp price movements of certain commodities due to unseasonal rains.

Banks have restructured debt worth Rs 4,000 crore of four commodity companies, namely, Laxmi Solvex, Dhanlaxmi Solvex, Ambika Solvex and Utkarsh Industries, a senior banker said on condition of anonymity. “These companies are based in Madhya Pradesh and they deal in soya oil and de-oiled cake,” said the banker. “The sharp movement in soya prices due to unseasonal rains has affected these companies,” the banker said.

The debt recast of these companies has raised some concerns recently after the banking industry took a Rs 4,000-crore hit when the Reserve Bank of India declared REI Agro a fraud. Public sector banks will be the worst affected in case loans to several commodity players turn bad, the banker said.

The industry in 2014 had written off loans worth Rs 9,000 crore given to Winsome Diamonds and Electrotherm India, which were also listed as frauds. “You can never be certain of any diversion of funds as promoters in India can come up clean in a new avatar and are not liable,” a private sector banker said.

RBI governor Raghuram Rajan has been critical of banks resorting to debt recast and postponing the problem of identifying bad loans. The central bank has made loan recast tough by withdrawing regulatory forbearance. Banks ease the loan tenure and reduce interest rates to enable companies tide over bad times under debt recast.

Banks have restructured debt to the tune of Rs 2,86,405 crore in the year ended March 2015, up 18.22% from Rs 2,42,259 crore in the previous year. According to ratings company Crisil, 40% of assets restructured during 2011-14 have degenerated to NPAs. In 2015, select banks have classified loans given to Bharati Shipyard, ABG Shipyard, GTL and Essar Steel as bad. Industry analysts and insiders expect things to get better though.

“The latitude now afforded to flexibly structure project loans will enable lower slippages from large exposures,” said Pawan Agrawal, chief analytical officer at Crisil Ratings.