Bengaluru, July 20, 2017

Aggressive cuts for metals & construction

Banks are likely to take a haircut (write-off) of Rs 2.4 lakh crore, or 60% of bad loans to settle 50 large stressed assets with debt of Rs 4 lakh crore.

These 50 companies are from the metals (30% of total debt), construction (25%), and power (15%) sectors, and account for half of the Rs 8 lakh crore of the non-performing assets (NPAs) in the banking system as on March 31, 2017, according to ratings agency CRISIL.

CRISIL estimates that banks have provisioned for about 40% of this exposure. “We used the economic value approach to assess the haircuts,” Pawan Agrawal, Chief Analytical Officer, CRISIL Ratings said. “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,” he said.

The sources of stress are policy or demand (power plants), lower capacity utilisation (steel plants), and over-leveraged balance sheets (construction companies). The restructuring tools facilitated by the RBI, which the indebted companies had availed earlier, did not help because of very high debt levels that underscore the magnitude of stress.

The government recently promulgated an ordinance empowering the RBI to issue directives for faster and optimum resolution of stressed assets so that they become viable. The focus now is on optimum debt reduction, including through potential transfer of assets to a different management.

Haircuts have been classified into four categories — marginal (75%). A quarter of the debt analysed needs marginal or moderate haircuts, while a third needs aggressive, and nearly 40% deep haircuts, CRISIL said.

“Companies from the power sector would require moderate haircuts, while those from the metals and construction sectors would need aggressive ones,” Agrawal said.

India’s banking sector is currently under stress with non-performing assets (NPAs) rising to Rs 8 lakh crore as on March 31, 2017, or 9.4% of total outstanding loans, from Rs 6.1 lakh crore as of March 31, 2016.

[The Deccan Herald]