India Inc's loan recast set to hit record Rs 1.5 lakh crore in FY12

MUMBAI: Companies in distress are rushing to restructure loans before the close of the fiscal to ensure working capital flows next year, and help banks dress up financial ratios when they present annual earnings in a year that will set a record for restructured loans since they were introduced in 2001.

The Corporate Debt Restructuring Cell, a group comprising representatives from banks, will in the next two weeks take up as many as 20 cases to approve easier principal and interest repayment schedule after near-defaults, said a person familiar with the plan. It is not certain that all these cases aggregating about Rs 8,000 crore will be approved, he said.

Total loan restructuring is expected to rise to Rs 1.5 lakh crore by March-end, from Rs 1.1 lakh crore at the end of March 2011, and Rs 86,500 crore in FY2009, data collated by ET shows. The number for this year does not include loans of real estate companies that are being restructured at the bank level, and those of state-run Air India that is done with the government's blessings. Private sector rival Kingfisher Airlines is attempting one.

"There is under-recognition of non-performing loans in the banking system," said Bobby Parikh, chief mentor at BMR Advisors. "Some of the loan accounts that are being restructured have limited potential for recovery. To that extent, the NPAs are being understated and I am sure the Reserve Bank of India is monitoring the situation."

Loan defaults are surging as companies see their finances strained due to high interest cost and rising input prices.

Banks under Watch

Overleveraging during good times and regulatory hurdles in recent quarters are also forcing companies to miss payments. GTL Infrastructure, a telecom tower group; microfinance company BASIX; and Deccan Cargo and Express Logistic, founded by Captain Gopinath, are among companies whose loans have been restructured this year, document from the CDR Cell shows.

Benchmark lending rates by the nation’s biggest bank, State Bank of India, which remained at an average of 10.25% for about four years between 2002-03 and 2005-06, jumped to an average of 12.25% in the next three, at a time companies loaded up more debt.
Although rates fell for about a year after, they began rising soon. Builder Hindustan Construction Co and Hotel LeelaVenture, where ITC is at the door with a 13% holding, are among the cases that will be taken up by the CDR Cell next week.

“The HCC proposal has just come to us today and we are examining it,” said the person. “Banks may have to downgrade Hotel LeelaVenture as the restructuring process may not be complete by March 2012. But they can upgrade the account once the process is complete.” The rise in stress has forced a cautionary stance on the Indian banking sector by analysts and rating companies. With sliding loan demand adding pressure on banks’ earnings, credit profile of some banks may be hurt.