In Default Mode

Men in black swarm the fifth and sixth floors of Scindia House, in South Mumbai’s Ballard Estate. These are no gunslinging secret agents fighting intergalactic criminals, but file-toting lawyers at one of the country’s nearly three dozen Debt Recovery Tribunals, or DRTs, a quasi-judicial, liberalisation-era system for banks to settle default cases. The pressure-cooker atmosphere of these courts, which belies the calm on the streets below, reflects the heightened stress in the country’s banking system. DRT courts hear hundreds of default cases on an average day.

In courtroom number three, two officials of Bangalore-based Vijaya Bank wait anxiously for bids to open for the public auction of a suburban Mumbai flat. Borrower Rajendra Warekar, who defaulted on his home loan a few years ago, is absent. He owes the bank around `20 lakh, but the value of the property has appreciated (the tribunal fixed a reserve price of `52.6 lakh in October). Unfortunately for the bank, however, recovery officer V.K. Malviya announces that not a single bid was received for the property.

“We will restart the process,” says a DRT officer on condition of anonymity. This means issuing a fresh public notice, re-inspecting the property, inviting bids again, and holding another auction. It will take another two months at least. The DRT order favouring Vijaya Bank in the case was passed in 2009.

Debt recovery is frustrating for any bank. In theory, DRTs dispose of cases within six months. But the reality is that it can take years. Banks have been on a retail lending spree in recent years, so recovery is a bigger problem than before. What makes it worse is the paltry amount for which officials must make rounds of the courts.

DRTs are flooded with cases against individuals and companies. When the global financial meltdown hit the Indian economy, there were some 2,000-odd cases in the DRTs, totalling some`4,000 crore, in 2008/09. A year later, the figure had tripled to 6,000, worth around`10,000 crore.

With soaring inflation and high interest rates making it hard for families to repay debts, banks’bad assets are piling up fast. For retail borrowers, floating interest rates are now 250 basis points higher than 18 months ago, and equated monthly instalments have increased by some 15 per cent. Trends for corporate borrowers are similar. As a result, gross non-performing assets, or NPAs, of banks are close to `1 trillion (one trillion equals 100,000 crore). But no bank wants to go on record about its NPAs.

Not all bad assets end up as DRT cases. Debt restructuring can offer an asset a reprieve for a few months or a year. Manoj Tirodkar, whose mobile phone tower company GTL Infra has a debt of `10,338 crore, asked his creditors – State Bank of India (SBI), ICICI Bank, Standard Chartered Bank, Bank of India, Bank of Baroda and Axis Bank – earlier this year to restructure his debt. The 2G scam, high interest outgo and slowdown in demand hurt his capacity to pay interest on the money he had borrowed. GTL Infra is not alone: Chennai Network, Empee Sugars, Maneesh Pharma and Ruchi Power are among hundreds of companies that have sought to restructure their debt. This trend is bad news for bankers.

“A large account can swing NPA figures,” S.B. Nayar, Deputy Managing Director(Corporate Banking Group), SBI, said on the sidelines of a conference after Moody’s downgraded the bank’s bond issue. He gave the example of KS Oil, a leading edible oils company and a well-paying asset in many banks’ books, which suddenly turned bad when some of its futures bets went wrong. It is now seeking to restructure a debt of`2,564 crore. “The asset quality situation is fluid,” says Nayar.

There are also instances of stressed debt being converted into equity. Early this year, over a dozen banks, including SBI, ICICI Bank, IDBI, Bank of India, UCO Bank and Punjab National Bank, agreed to convert their `750 crore debt in Vijay Mallya’s Kingfisher Airlines into equity. Unfortunately, the value of their shares has eroded. The equity now has a value of some`220 crore, which amounts to an erosion of about `530 crore. The airline still has loans of `6,000 crore on its books, and could create problems for banks if it defaults.

Amongst public sector banks, Delhibased Punjab National Bank currently has the most restructured debt on its books –some `15,314 crore, or 6.28 per cent of gross advances. More than half of the re- structured debt on its books is power sector loans. “Our slippage record from restructured assets is low,” says a top official of the bank, referring to restructured loans that turn into NPAs. However, many experts say a large part of restructured debt in the banking system is slippage waiting to happen.

At a recent meeting of bankers and officials of the Reserve Bank of India, or RBI, bankers warned that non-performing assets may rise sharply unless the central bank takes a pragmatic view on debt restructuring. They see danger in sectors such as aviation, telecom, real estate and infrastructure.

On October 4, when credit rating agency Moody’s announced it was downgrading SBI’s perpetual bond issue, RBI held a closeddoor meeting with bankers to discuss concerns about risk due to sectoral and especially geographic concentration. “Steel exposure is abnormally high for banks in eastern India, while banks in the South have a high exposure in textiles,” said a bank official who was at the meeting.

Ananda Bhoumik, Senior Director at Fitch Ratings in Mumbai, points to a third type of risk of concentration that Indian banks face: exposure to the top 20 corporates as a percentage of the bank’s equity.“This could result in more volatile NPAs than those we saw in the last decade,” he says. He attributes most of the growth of banks to their funding of infrastructure projects.

Two weeks after Moody’s downgrade of theSBI bond issue, credit rating agency CRISIL published a report which put stressed loans in the power sector at some `56,000 crore. Power is the biggest component of the infrastructure sector, and its biggest risk is raw material: many companies do not have long-term coal supply contracts, although they sign supply agreements with state electricity boards for up to 20 years.

When Business Today raised these concerns with SBI Chairman Pratip Chaudhuri, he did not respond directly. “The big corporates are anyway not borrowing,” he said. Companies such as Reliance, SAIL and BHEL, he said, do not need to borrow big amounts.

In the last four to five years, concentration is also a growing risk in the retail portfolio. Many banks have trimmed their portfolios, especially in unsecured loans. They have reduced or exited segments such as credit cards and car loans, with the result that home loans now dominate. In an interview with RBI Governor D. Subbarao, BT brought up the alarming new trend of banks extending the tenor of home loans to as much as 70 years. “It is something we must look into as the regulator, but it is perhaps not as big a concern as it is made out to be,”he says (see interview on page 17).

Avendus Equity Research, in a recent report on IDBI Bank, has hinted that the bank has greater slippage in its portfolio of loans to small and medium enterprises. Another area of concern is agricultural loans. According to Standard Chartered Bank’s annual report for 2010/11, net NPAs amount to 0.64 per cent of total advances to the agricultural sector, 0.46 per cent for industry, 0.43 per cent for personal loans and 0.34 per cent for services. The quantum of loans is lower in the agricultural segment than in others, but the share of bad loans there is higher.

Banks are adjusting to new ground realities. “Portfolios have been washed out in the last two or three years,” says Romesh Sobti, Managing Director and CEO, IndusInd Bank, an apparent reference to the decline in the number of credit cards in the country, from 27 million before the global downturn to17 million by March 2011 (although spending has risen during this period).

These are tough times. A Moody’s stress test scenario for SBI pegs its gross NPAs –which were 3.28 per cent in 2010/11 – at 12 per cent, if the worst should come to pass. This would convulse the banking system, and theDRTs may be able to do little about it.