Is debt restructuring the only option?

Thu, 8 Dec Pre-Open

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From moving full steam, the India economy has shifted to a lower gear. India's GDP growth for the second quarter of financial year 2011-12 came in at a disappointing 6.9% YoY. Not surprisingly this has had an effect on the banking as well. Most banks have revised their credit growth targets for the year from over 20% to the late teens on account of growth concerns.

The thirteen rate hikes undertaken by the central bank Reserve Bank Of India (RBI) has definitely taken its toll on the economy. While inflation has not moderated much, growth definitely has taken a hit. The RBI has maintained its credit growth target of 18% YoY. However data as on 18th November 2011 shows that credit growth has moderated to 17.4%.

Corporates are also now staring straight at the barrel of a gun. The slowing economy has reduced demand for their products and services. Interest costs are also eating into whatever little profits they manage to eke out. Thus, many companies are approaching bankers in order to restructure their debt. According to an article in the Economic Times, the total amount of requests for restructuring has come in at Rs 289 bn in the July-September 2011 period.

PSU banks have led the party on this front with Punjab National Bank receiving the most requests for corporate debt restructuring (CDR). It was followed closely by IDBI Bank and then Union Bank of India. Since June the total cases referred under CDR increased by only 3 to a total of 19 currently. However the shocking part is that However, the amount increased almost five times in 2QFY12 from just Rs 56 bn in 1QFY12. So far this year, CDR referrals have reached an eight year high.

But is CDR all that bad? Restructuring the debt burden can actually inject a lifeline into companies which are gasping for their last breath. Air India and Kingfisher Airlines may not be the best examples to cite here. But there are smaller companies with fundamentally stronger business models that could do with some debt restructuring. However with more and more companies opting for the same, we hope this is not a case of them simply shying away from responsibilities. Plus with the difficult macro-environment and prevailing high interest rates the cases of CDR may continue to grow from current levels. Moreover, the risks of these turning non-performing assets (NPAs) also loom large. It is now up to the banks to figure out if restructuring the debt would the best way to keep their balance sheets clean.