The rating agency Crisil on Wednesday said that banks may have to take a haircut of 60%, worth ₹2.4 lakh crore, to settle 50 large stressed assets with debt of ₹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 ₹8 lakh crore non-performing assets (NPAs) in the banking system as on March 31, 2017.
The agency also estimated banks have provisioned for about 40% of this exposure. “We used the economic value approach to assess the haircuts,” said Pawan Agrawal, chief analytical officer, Crisil Ratings in a statement.
“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.” The sources of stress are policy or demand (power plants), lower capacity utilisation (steel plants), and overleveraged balance sheets (construction companies).
‘Tools didn’t help’
However, Crisil said that the restructuring tools facilitated by the Reserve Bank of India that indebted firms had availed of 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 to make them viable.
The focus now is on optimum debt reduction including through potential transfer of assets to a different management that can bring in resources needed to scale up cash flows.
A quarter of the debt analysed needed marginal or moderate haircuts, while a third needs aggressive, and nearly 40% deep haircuts. “Companies from the power sector would require moderate haircuts, while those from the metals and construction sectors would need aggressive ones,” Mr. Agrawal said.
Majority of the debt requiring deep haircuts belong to companies with unsustainable businesses so asset sales are necessary to recover monies. Firms needing moderate or aggressive haircuts had gone for debt-funded capex. As demand slumped, or as projects ran into regulatory issues, significant time and cost overruns made them unviable.
Firms needing a marginal haircut are those facing temporary setbacks, which could be corrected over time. “Some of these assets offer M&A opportunities for companies with strong credit profiles. Also, potential synergies could allow for a significant reduction in haircut — an aspect that has not been considered in our analysis,” said Ramesh Karunakaran, director, Crisil Ratings.
