Corporates
Corporate Stress
Restructured Assets May Surge on Revised RBI
Guidelines
One in Four Top 500 Corporate Borrowers Could be Tagged Stressed by FY15
Special Commentary
Potential Surge in Restructured Assets: India Ratings & Research expects restructured
assets in the banking system to increase in the range of INR600bn-INR1, 000bn in the next five
months.
The agency analysed the credit metrics of the top 500 corporate borrowers, which accounted
for the largest debt (in Indian rupee) on their balance sheet at FYE14. The aggregate debt of
these 500 corporates is INR28,760bn, which is 73% of the total bank lending to industry,
services and export sectors. Around 82 of these 500 largest borrowers have already been
formally tagged as financially distressed (identified as NPA, CDR or restructured). Another 83
(17%) of these top 500 borrowers accounting for 9% of the overall debt (INR28,760bn) of the
group, have severely stretched credit metrics.
Within these 83 corporates, operating profitability barely covers the interest required to be
serviced in most cases, and there is also the absence of any strong parent. These corporates
with severely weak credit metrics (Appendix 1) have limited expectation of an immediate
improvement in profitability. However, these are not publicly tagged as financially distressed
thus far.
Incremental Restructuring of INR600bn-INR1,000bn: Potentially one-third to half of these 83
accounts could be in the category of SMA 2 (special mention accounts) with delays in debt
servicing ranging between 61-90 days. If some of these corporates are unable to generate
significant cash flow or infuse significant equity in the near term, they may be identified by their
lenders for restructuring pursuant to the Reserve Bank of India‟s (RBI) guidelines.
Some of these corporates could also even deteriorate further to be tagged as NPA. The
cumulative impact may be an incremental INR600bn-INR1,000bn of restructured assets in the
banking system in the next five months. Some of these corporates could have already
undergone bilateral restructurings; however, this in Ind-Ra‟s estimates may be an insignificant
number and should not affect the conclusion of this study.
Related Research
Balance Sheet Strength of BSE 500
Corporates 2014
Corporate Risk Radar: 2014-2015
Study of Impact of RBI’s Policy Decisions
on Corporates
Impact of Interest Rate Hike on BSE 500
Corporates-II
Analysts
Deep N Mukherjee
+91 22 4000 1721
[email protected]
Ankit Sunil Bhembre
Possibly Protracted Corporate Recovery: The aggregate corporate metrics have shown
tentative signs of bottoming out from 2HFY14 (Refer: Balance Sheet Strength of BSE 500
Corporates 2014: Bottoming out More Certain, Recovery Proof Awaited, published in
September 2014). While corporates‟ cash generation ability has shown a minor uptick, it may
not improve substantially in the next six to nine months. Thus, the weakest corporates with
stretched credit metrics may remain so in the short to medium term.
RBI Guidelines for Stress Identification: Since May 2013, RBI has provided several
directives and guidelines to banks with the purpose to gradually withdraw prevalent regulatory
forbearance and simultaneously boost their risk management practises by the early
identification of stressed corporate accounts.
End of Regulatory Forbearance: The calibrated withdrawal of regulatory forbearance will pick
up speed from 1 April 2015. This will require banks to keep higher provisions on restructured
accounts, besides entailing a suitably stringent classification of restructured accounts as substandard assets.
www.indiaratings.co.in
4 November 2014
Corporates
Revitalising Distressed Asset: The RBI‟s notification on 21 October 2014 provided further
clarity on the implementation aspects of the stressed account identification. Timelines have
also been spelled out, by which lenders should be able to decide on the actions required to
correct the account‟s performance.
Tentative Implication of the Guidelines: A restructuring plan could be implemented for
accounts which are in delay for more than 60 days within another 90 days. Such a plan, meant
for correcting the accounts‟ behaviour, should be prepared by the Joint Lender‟s Forum, with
the viability of the plan duly assessed by an Independent Evaluation Committee. In essence,
accounts, which may be tagged as SMA 2 between October-December 2014, would be either
normalised or put up for restructuring. This decision is to be arrived by the lenders by 31 March
2015.
Accounts, which are currently identified as SMA 2, would be considered for either rectification
or restructuring. Rectification would possibly require a palpable proof of strong cash flows in
immediate future or a significant infusion of equity into the company. While corporates‟
performance is bottoming out, a lot of corporates may not be able to generate significant cash
flow or receive meaningful equity infusions in the next three to six months. Thus, they may be
suitable cases for restructuring.
Possible Response of Bankers: The gradual withdrawal of regulatory forbearance could
persuade banks to take a decisive call on the weak corporates that need to be restructured with
the timeline of 31 March 2014 in mind. The RBI guidelines also incentivise banks that quick
implementation of a restructuring package would enable them to benefit from the existing
special asset classification of such restructured accounts. Thus, there is sufficient economic
motivation for banks to undertake the INR600bn-INR1,000bn „big bath‟, where accounts whose
performance may deteriorate could be addressed at one go, enabling banks to start FY16 on a
relatively clean slate.
Post 2013, the amount of corporate debt referred to restructuring has shot up. In fact the
average ticket size of corporate debt restructuring (CDR) packages approved has crept up post
May 2013. While the coincidence of the spike in CDR amounts with respect to RBI‟s
announcement of withdrawal of regulatory forbearance is difficult to miss, it must be
acknowledged that on-going poor economic conditions were definitely a significant reason
behind this observation. The last quarter of a financial year has always seen a spike in the
aggregate amount of debt approved for CDR. 2HFY14 saw approved CDR packages for debt
worth IND580bn.
Restructured Assets May Surge on Revised RBI Guidelines
November 2014
2
Corporates
Appendix 1: Summary Details about 500 Highest Debt Holders
Around one-third to half of the corporates tagged as „Severely Weak Credit Metrics‟ could be
tagged as SMA2, a substantial portion of which is likely to subsequently be tagged as
restructured assets or NPA.
Figure 1
Break Up of 500 Corporates by Potential for Distress
Known cases of
stress
16%
Severely weak credit
metrics
17%
No immediate threat
67%
Source: Ind-Ra
Figure 2
Break Up of Rupee Debt of 500 Corporates
Total debt
(INRbn)
25,000
Total INR debt
23,007
20,005
20,000
15,000
10,000
3,197
5,000
2,742
2,555
2,431
0
No immediate threat
Known cases of stress
Severely weak credit metrics
Source: CDR Cell, Ind-Ra
Restructured Assets May Surge on Revised RBI Guidelines
November 2014
3
Corporates
Appendix 2: CDR Trends
Figure 3
Debt Referred to CDR
Incremental debt amount received during the period
(INRbn)
500
Incremental debt amount approved during the period
400
300
200
100
Sep 14
Jun 14
Mar 14
Dec 13
Sep 13
Jun 13
Mar 13
Dec 12
Sep 12
Jun 12
Mar 12
Dec 11
Sep 11
Jun 11
FY10-11
FY09-10
0
Source: CDR Cell, Ind-Ra
Figure 4
Number of Companies in CDR
Incremental references received during the period
(Number)
Incremental references approved during the period
49
50
40
41
31 31
30
35
33
27
18
20
27
24
18
10
10
17
25
16
17
39
30
18
33
31
28
25
14
16
7
12
17
10
14
19
2
Sep 14
Jun 14
Mar 14
Dec 13
Sep 13
Jun 13
Mar 13
Dec 12
Sep 12
Jun 12
Mar 12
Dec 11
Sep 11
Jun 11
FY10-11
FY09-10
0
Source: CDR Cell, Ind-Ra
Restructured Assets May Surge on Revised RBI Guidelines
November 2014
4
Corporates
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Restructured Assets May Surge on Revised RBI Guidelines
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