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Rs 2.4 Lakh Crore Debt Being Resolved Under RBI’s New Stressed Asset Framework, Says Credit Suisse

Nearly half of the stressed assets being resolved under RBI’s new NPA framework belongs to NBFCs, says Credit Suisse in a report.

The Reserve Bank of India’s regional headquarters in New Delhi. (Photographer: T. Narayan/Bloomberg)
The Reserve Bank of India’s regional headquarters in New Delhi. (Photographer: T. Narayan/Bloomberg)

The amount of debt being resolved under the Reserve Bank of India’s new stressed asset framework is close to Rs 2.4 lakh crore, Credit Suisse Group AG estimated in its latest ‘Corporate Debt Tracker’ report.

Inter-creditor agreements have been signed for this debt and lenders are currently in the 180-day period within which a resolution plan has to be finalised.

“While bank non-performing assets declined from 11.7 percent in March 2018 to 9.6 percent in Q1 FY20, we now see stressed loans again exceeding 12 percent. Inter-creditor agreements (ICAs) are the only restructuring framework available to banks. Debt of Rs 2.4 lakh crore across 16 stressed corporates is being put through this, partly as IBC outcomes have also slowed,” said Ashish Gupta, managing director and head of equity research, at Credit Suisse India.

Nearly half of the stressed debt being currently resolved under the framework belongs to non-bank lenders. “Debt restructuring of some NBFCs under ICA now appears likely and recent finance bill has also given RBI powers to merge/de-merge NBFCs,” Credit Suisse noted.

Rs 2.4 Lakh Crore Debt Being Resolved Under RBI’s New Stressed Asset Framework, Says Credit Suisse

Among the non-financial debt being resolved through inter-creditor agreements, over 70 percent is with firms which are considered to be chronically stressed.

These are firms which have gone through previous restructuring and the probability of recovery from them may be lower. Credit Suisse defines these companies as with interest coverage ratio of less than one for 12 quarters.

An interest coverage ratio of less than one shows that a company’s earnings are not enough to cover its interest payments.

Rs 2.4 Lakh Crore Debt Being Resolved Under RBI’s New Stressed Asset Framework, Says Credit Suisse

More broadly, corporate credit quality remained unchanged. The share of debt with an interest coverage ratio of less than one remained stable at 42 percent.

“Aggregate interest cover declined to 2.3x vs 2.7x year-on-year, despite Ebitda growing 12 percent year-on-year,” said Credit Suisse.

According to the report, telecom remains the weakest among stressed sectors while power has seen some improvement.

  • 100 percent of telecom debt has an interest coverage of less than one. The three largest telecom operators have Rs 3.5 lakh crore of debt. However, about 45 percent (Rs1.6 lakh crore) of the debt is from the government (spectrum debt).
  • Power companies saw an improvement in the April-June quarter of 2019-20, with Adani Power Ltd.’s interest coverage ratio moving above one.
  • The steel sector saw some deterioration in the June quarter, with share of debt with interest coverage less than one increasing to 24 percent (vs 22 percent in the previous quarter). Steel Authority of India Ltd. and Uttam Galva Steels Ltd. saw their interest cover fall below one.
Rs 2.4 Lakh Crore Debt Being Resolved Under RBI’s New Stressed Asset Framework, Says Credit Suisse

The Credit Suisse report also pointed out that the share of debt that falls in the chronically-stressed bucket remains high.

The share of debt with companies having interest coverage ratio of less than one for the past 12 consecutive quarters has increased to 56 percent (Rs 8.3 lakh crore of debt) vs 35 percent a year ago, Credit Suisse said.

Rs 2.4 Lakh Crore Debt Being Resolved Under RBI’s New Stressed Asset Framework, Says Credit Suisse

It added that recoveries under the Insolvency and Bankruptcy Code remain slow.

  • The average time taken to resolve cases under the IBC has continued to increase and is now about 450 days vs the planned 180-270-day timeline,
  • Of the cases undergoing resolution, 17 percent have passed the 180-day limit and another 35 percent have crossed the 270-day deadline.
  • The quantum of debt recovered in the June quarter under IBC has declined to Rs 4,500 crore vs Rs 43,000 crore in the same period last year.
  • Aggregate recovery so far under IBC has been at about 60 percent haircut.
  • Of the 870 cases closed under IBC, about 55 percent have been closed through liquidation, resulting in lower recovery rates.
  • SBI alone has 123 accounts, with about Rs 25,700 crore of debt referred to NCLT, but yet to be admitted.
Bank push for the use of inter-creditor agreements for stressed loans is not surprising given the slowdown in the IBC process, Credit Suisse said. 
Rs 2.4 Lakh Crore Debt Being Resolved Under RBI’s New Stressed Asset Framework, Says Credit Suisse