New Delhi, July 19 (IANS) The banks will have to take a haircut of 60 per cent, worth Rs 2.4 lakh crore, to settle 50 large stressed assets with debt of Rs 4 lakh crore, a report showed on Wednesday.
These 50 companies are from the metals (30 per cent of total debt), construction (25 per cent) and power (15 per cent) sectors, and account for half of the Rs 8 lakh crore non-performing assets (NPAs) in the banking system as on March 31, 2017, rating agency Crisil said in a report here.
“It would be in the larger interest of the economy to pop the bitter pill of haircut than kick the can down the road. Estimates are that banks have provisioned for about 40 per cent of this exposure,” Crisil said.
“We used the economic value approach to assess the haircuts. 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,” said Pawan Agrawal, Chief Analytical Officer at Crisil Ratings.
The sources of stress are policy or demand (power plants), lower capacity utilisation (steel plants), and over-leveraged balance sheets (construction companies), the report stated.
“Companies from the power sector would require moderate haircuts, while those from the metals and construction sectors would need aggressive ones,” Agrawal said.
“The restructuring tools facilitated by the Reserve Bank of India (RBI) that the indebted companies had availed of earlier did not help because of very high debt levels that underscores the magnitude of stress,” it said.
The government recently promulgated an ordinance empowering the RBI to issue directives for faster and optimum resolution of stressed assets so that they become viable. The focus now is on optimum debt reduction including through potential transfer of assets to a different management that can bring in the resources needed to scale up cash flows.