Religare's analysis of 10 out of 15 strategic debt restructuring -SDR cases suggest that this scheme won’t help Indian banks’ deteriorating asset health – instead it increases the risk by deferring an estimated Rs1.5 lakh crore of NPA formation.
The strategic debt restructuring (SDR) is not a cure-all for deteriorating asset health of Indian banks and instead it exacerbates the risk by deferring an estimated Rs1.5 lakh crore or about $23 billion of non-performing asset (NPA) formation, which are 30-40 accounts or 2.2% of total credit, from FY16-FY17 to later years, says a research report based on analysis of 10 out of 15 SDR cases.
In the note, Religare Capital Markets Ltd, says, "Grim tidings from the Financial Stability Report (FSR) on stress in the system from large borrowers and weak sectors would prod the Reserve Bank of India (RBI) to tighten provisioning norms. We raise credit cost estimates across our coverage, pare target prices, and downgrade the sector to underweight."
"Our detailed interactions with companies under SDR, lenders, lawyers and industry experts suggest that banks may end up refinancing 30-40 ailing accounts under the scheme in the next one year, thus postponing NPA recognition of Rs1.5 lakh crore, or 2.2% of credit. We think banks have little scope to fully recover loans via the sale of assets given several pitfalls to SDR," it added.
Pointing out towards the inevitable massive write-offs, Religare says, SDR invocation is not treated as restructuring for asset classification or provisioning, and thus most cases have standard restructured assets with low provisions of 5%. It says, "Our analysis of 10 SDR cases invoked so far reveals that interest accruals and loss funding will push up debt by 70% from first restructuring via corporate debt restructuring (CDR) until conclusion of SDR. Banks will thus have to write-off 35-95% of interest (debt + equity) in FY17-FY18 if stressed assets find no takers. The lenient 5:25 scheme may also see slippages from cyclical sectors."
"The haircut in case of a takeover will also be high, resulting in huge provisions for banks even if the SDR is successful. Our fair enterprise value (EV) for six cases (three engineering, procurement, construction- EPC, three metal players) representing 67% of total SDR debt is 65-85% lower than the current EV," it added.
The FSR released by RBI also highlighted that levered companies’ debt as a proportion to total debt in the system has gone up by 200 basis points (bps) in the last one year. RBI’s two stress tests on credit concentration (group borrowers) and weak sectors (infrastructure, iron & steel, MSME & textile) reveal a severe impact on bank NPAs and net worth in case of defaults.
This, Religare feels, will make the RBI to strike back at banks. At present, banks retain existing classification on assets that have been stressed for one and a half to two years and also book income on the same. "To ensure lenders do not take undue advantage of SDR or the 5:25 schemes (most cases are concentrated in stressed sectors and/or with large group borrowers) to postpone NPAs, the RBI may require them to start building provisions for these accounts and/ or defer income recognition. This apart, the RBI’s recent list of 150 truant borrowers that may be classified as bad by FY17 would put further pressure on banks," it said.
Religare says, as of now, different banks treat the same account differently even when the structure of the loan is identical. It is this disparity in loan treatment that the central bank may like to address. "As per our discussions with industry experts, the RBI has asked banks to seek an auditor’s certificate if they wish to retain any of these loans under the standard category. Banks will have to classify such accounts as NPAs if any irregularities are found," it added.
According to the research note, FY2016 would be a painful year for corporate lenders. Religare cut its target price to book (P/B) multiples across its coverage that reflects the stress on bank books and adjusted its target prices for the restructuring hit. It says this would be around 50% from 20%-25% estimated earlier, due to surging debt in SDR cased and the likelihood of onerous write-offs. Religare has downgraded State Bank of India (SBI), Axis Bank and ICICI Bank to sell from buy, and for Bank of Baroda, CBK and Punjab National Bank (PNB) to sell from hold.