The financial sector is beginning to bear the brunt of deteriorating quality of corporate debt.
The corporate debt restructuring mechanism set up to help companies unable to repay liabilities has gone up over six times in the first six months of FY 12.
Bankers expect things to worsen in the next two quarters. A State Bank of India executive said, "The slowdown in growth and pressure from rising interest costs may substantially increase the number of cases referred to the CDR forum in the third and fourth quarters of FY12."
In fact, concerns over asset quality topped the agenda for pre-policy review discussions bankers had with the Reserve Bank of India last week.
Bankers requested they be allowed to recast CDR accounts for a second time for companies or units whose debt was reworked after the financial crisis in 2008.
According to the CDR Forum, a platform set up by banks and financial institutions, cases worth Rs 34,562 crore (Rs 345.62 billion) went for debt restructuring in the first half of the financial year compared to just Rs 5,179 crore (Rs 51.79 billion) in the year-ago period.
The number of companies referred has risen from 21 to 35.
GTL, a network services firm, and its telecom tower business associate entities accounted for almost 70 per cent of the amount at Rs 22,621 crore (Rs 226.21 billion).
Even after excluding GTL, the debt restructuring amount more than doubled to Rs 11,941 crore (Rs 119.41 billion).
That mostly involved medium-size units from the steel, textiles, pharmaceutical, infrastructure and
Some of the other companies in the list are K S Oil (Rs 2,564 crore or Rs 25.64 billion), Maneesh Pharma (Rs 1,179 crore or Rs 11.79 billion) and Ruchi Soya (Rs 600 crore or Rs 6 billion).
In December 2008, the RBI had allowed banks to again restructure debt of viable units with lowering status of account, as a one-time measure.
Bankers said there were a number of reasons for more companies being referred to CDR. For one, many have been unable to bear the burden of rising interest costs.
These units are already under pressure of high input costs and lack of overseas demand.
Referring a company to CDR eases the restructuring process.
A senior executive with the Bank of Baroda said, "The bank or financial institution is able to control slippages by taking early action.
"But, this restructuring comes at the cost of higher provisioning."
According to RBI norms, banks have to make a provision at two per cent for the restructured account, which is treated as standard asset.
For a normal standard loan, provisioning is made at 0.4 per cent, which puts pressure on the bottom line.
The references in April-September 2010 had declined due to a better business environment. Some companies, which would have landed at CDR, were able to repay on time.
Rating agency Crisil in its September report said banks' gross non-performing assets ratio was expected to increase to nearly three per cent by March 31, 2012 from 2.3 per cent a year ago.
The significant increase in interest rates over the past 18 months will adversely impact the asset quality and profitability of India's banks.
