‘Banks may need to forgo Rs. 2.4 lakh crore’:

‘Banks may need to forgo Rs. 2.4 lakh crore’: (60% haircut needed to settle 50 large stressed assets with Rs 4 lakh cr debt: Crisil)

Context: Banks may have to take a haircut of 60 per cent, worth ₹2.4 lakh crore, to settle 50 large stressed assets with debt of ₹4 lakh crore, according to an analysis by credit rating agency Crisil. Introduction:

• In banking parlance, haircut is the difference between the market value of an asset used to loan collateral and the amount of the loans. The amount of the haircut reflects the lender’s perceived risk of loss from the asset falling in value or being sold in a fire sale
• These 50 companies are from the metals (30% of total debt), construction (25%) and power(15%) sector, and account for half of the Rs 8 lakh crore non-performing assets (NPA) in the banking system as on March 31, 2017.
• The government recently promulgated an ordinance empowering the RBI to issue directives for faster and optimum resolution of stressed assets to make them viable.
• According to the Crisil, 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.

Four categories:

• Crisil has classified the haircuts into four categories- marginal (less than 25 %), moderate (25-50%), aggressive (50-75%), and deep (greater than 75%).
• The agency observed that the majority of the debt requiring deep haircuts belongs to companies with unsustainable businesses.
• Companies needing a marginal haircut are those facing temporary setbacks, which could be corrected over time.

Key points:

• Companies from the power sector would require moderate haircuts, while those from the metals and construction sectors would need aggressive ones.
• 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.
• The rating agency also estimated banks have provisioned for about 40% of this exposure.
• Companies from the power sector would require moderate haircuts, while those from the metals and construction sectors would need aggressive ones.