Bank NPAs can double if 2008 restructuring fails to work

RBI, has expressed concerns on asset quality of debt restructured during the 2008 credit crisis and has indicated NPA’s may see a sharp surge if the same were to turn bad.

“There was always a concern with regard to the restructured standard accounts,” the RBI points out in its report on Trend and Progress of Banking in India. “The concern is that the recoveries have not kept pace with slippages. Rising interest rates and substantial amount of restructuring done during the crisis, if not done with due care, are likely to put further pressure on asset quality of banks.”

The Indian Banking System, which is already facing wrath of Rating Agencies and restructuring pressures from high ticket debts to power sector, airlines, infrastructure companies may not be sufficiently capitalized to face the double jeopardy. Ratings agency Moody’s downgraded the Indian banking sector on November 9 to ‘negative’ from ‘stable’. Moody’s stated “concerns that an increasingly challenging operating environment will adversely affect asset quality, capitalisation, and profitability…. A specific area of concern … is the concentrated and high pace of lending to the infrastructure sector by public sector banks, raising apprehensions of increasing delinquencies in the future,”.

The stress in the system may become unsustainable for many banks with inadequate capitaliztion, with the onset of Basel-III, which mandates higher capital and comes into effect in 2013.

UP Sugar Mills face heat of SAP increase – Urge for increasing Sugar Price

The Uttar Pradesh government has effected a steep increase of Rs 35/quintal in the price of sugar cane for this year. Mayawati, CM of UP has announced that the State Administered Price (SAP) of the common variety of cane for the 2011-12 season is being increased to Rs 240 per quintal as compared to Rs 205 per quintal for preceding year. SAP for the early variety has been raised from Rs. 210 per quintal to Rs. 250 per quintal and for the sub-standard variety has been raised to Rs. 235 per quintal.

Indian Sugar Mills Association director general Abinash Verma, in a reaction to this has said that the conversion cost of cane to sugar would work out to Rs 33/kg ex-mill if they pay the mandated rate of Rs 240/quintal.

“This is when we are taking in the best case scenario of a 9.3% recovery rate and also factoring in revenue from bagasse and molasses. At Rs 33/kg ex-factory cost, the price for consumers would work out to Rs 36-37/kg for us to be able to survive financially. But the current market rate is Rs 33/kg and we would be suffering a huge loss if we pay SAP,” he said. He expressed fears that the working capital of mills would erode in less than two months and they will eventually default in making payment to farmers on time if forced to pay farmers according to SAP.

The Sugar Mills Association are now lobbying the State Government to push Center to increase Sugar Exports, which can adjust domestic Sugar prices to move upward to at least Rs. 36~37 per Kg, at which level it would be financially viable to absorb the SAP. However, this seems hard to come by from a government already struggling to combat the surge in food inflation.

Sugarcane Technologists Association of India, President, Dr GSC Rao, said the time has come for the industry and the government to start debating the right price for sugar rather than for cane, as it is directly linked to the financial viability of mills. The Rs. 35 per quintal increase in cane price comes after a similar increase of Rs. 40 per quintal in the immediately preceding year.

The increase in SAP is being seen as a political ploy to lure 40 lakh with legislative Assembly elections due in the state in 2012.

The sharp increase in SAP may not translate into farmers gain if Sugar Prices are not pushed up from present levels of Rs. 29~30 per Kg to Rs. 36~37 per Kg, as that may only mean eminent default in bank loans and farmers dues by Sugar Mills because of non-viable operations. On the other hand Central Govt. is likely to try its best to maintain the Sugar Prices to keep food inflation under check. Amidst this political and economic tussle the fate of Sugar Mills in UP will hang in balance for sometime.

IDFC plans launch of private equity fund next fiscal to buy stressed assets

SOURCE : ECONOMIC TIMES

Infrastructure Development Finance Co. (IDFC), the top lender to building roads and utilities, plans to launch a private equity fund next fiscal as it sees investment opportunities after the stress in the system plays out due to troubles in the power sector.

The company, which reported a 55% rise in September quarter earnings said though its exposure to power sector was as high as 43%, it is mostly in non-conventional and operational projects, hence less risky. But there could be some restructuring of about 4-5% of loans to power sector. There could be mergers and acquisitions opportunities too.
“If you dig deeper there are jewels,” Sunil Kakar, group chief financial officer told ET.

“If you look at the surface, it may be dark, but there are jewels as in the case of diamonds. There may be short-term pain, but there’s no doubt about the long-term India story.”

The size of the fund will depend on the market conditions nine months hence, he said.

Lenders, led by Punjab National Bank and others, are restructuring loans to the power sector amounting to thousands of crores of rupees to avoid stress in the financial system. Power producers are facing sliding revenues due to losses at near monopoly state distribution companies that sell power at subsidised rates.

Environmental issues are also stalling construction of new projects with plants, including East Coast Energy’s, being halted. State distribution companies’ losses soared 45% last fiscal to an estimated Rs 40,000 crore.

The financial difficulties of some companies could turn out to be opportunities for others to buy them at attractive valuations.

“I am aware that there are many conversations that are ongoing. But Iam not aware that any transactions have actually being concluded,” an IDFC official said in response to a question during the analysts’ call on whether the stress in power sector could lead to takeovers.

But the takeovers in the power sector may not happen quickly as promoters look for some policy changes from the government and the central bank.

“M&A in the Indian context as you know is not an easy thing, it takes time,” said the executive. “So people want to hold out till the last and I suspect there are a lot of people who are still trying to hold on and hold out.”
Although demands from IDFC clients are not as strong as in the case of banks, there could be some. “In the first six months, there has not been any restructuring, but we expect some in the next 18 months. But that will be only 2-3% of our total loan book. We are actively watching.”

 

Allahabad Bank freezes lending loans to power sector on increasing financial stress

Financial stress to banks caused by the power industry increased with Bank of India set to restructure a quarter of its power loans and Allahabad Bank freezing lending to the sector whipsawed by losses at state distributors and hurdles to new plants.

Loans to Tamil Nadu Electricity Board and Rajasthan Electricity Board will be restructured – the tenor of the loans and interest payable will be changed – to avoid an imminent default and firewall banks from rising bad loans, senior bank officials said.

“We have received requests from one or two state electricity boards and we are looking into it,” said Bank of India Executive Director BA Prabhakar. BoI has lent Rs 8,000 crore to various state boards. “We have yet not restructured. No one has defaulted yet.”

The country’s financial system is under stress because of mounting losses at state distribution companies and thwarted project clearances. Some projects, such as East Coast Energy – in which Goldman Sachs and General Atlantic are stakeholders, are stuck half way because of local protests.

Subsidised tariffs have pushed power distribution companies to the brink of collapse with losses soaring last fiscal by 45% to an estimated Rs 40,000 crore.

Allahabad Bank, which has lent more than Rs 13,600 crore to utilities and distributors, has stopped lending to the sector.

“In the past six months, we have not sanctioned a single fresh loan. Till things are clearer … we don’t want to go into this area,” Allahabad Bank CMD JP Dua said.

Dena Bank and Indian Overseas Bank are also considering to restructure loans to the power sector. Punjab National Bank restructured Rs 2,500 crore of loans to power companies last quarter.

Source: Economic Times

Aviation Industry reeling under pain of Cut Throat Competition, Rising Fuel Costs – After Kingfisher and Indian Airlines, Jet Airways considering Operational/ Financial Restructuring

Indian aviation industry continues to show signs of struggle. The dire state of the airline industry is evident by the fact that except Indigo, pretty much all the operators are expected to post losses for the quarter ending September. The saga of state run carrier Air India is no news and still remains to be addressed after several rounds of restructuring and capital infusion. Kingfisher Airlines has also been struggling to stay, afloat doing every thing from shutting low cost operations, to restructuring its debt, yet always in news for liquidity snags. To join the list is Jet Airways which is saddled with significant debt of Rs. 13,500 crore, and is struggling to compete with low cost carriers amid rising margin pressures. The operating costs of the airlines are on a rising spree on account of 45% rise in fuel costs over last one year and plethora of state and central taxes.

Jet Airways is learnt to be considering significant operational restructuring starting with cost cutting measures including laying off about 10% of its employees. Given its past experiences Jet airways may face a strong opposition for lay offs and cost cutting. On a longer horizon the airlines is also learnt to be shifting 80-85% of its operations on low cost model and eventually merging Jet Airways with its low cost vertical Jet Konnect.

It seems the India aviation industry is still unable to decipher the code for a stable and robust business model. Different carriers have come up with varying approaches to handle the crisis with some finding low cost model to be ultra competitive and unsustainable, while others swear by the model to gain the numbers and are sharply scaling down the full service vertical. For eg. Kingfisher Airlines in process of restructuring its operations to combat the stress, has shut down Kingfisher Red (its low cost arm formed by acquiring Deccan Airways) and decided to concentrate on full service operations, which is in sharp contrast to Jet Airways which plans to significantly scale down full service operations and size up low cost operations to 85% of its revenues.

The state of Indian aviation industry, requires policy intervention, to protect the industry from numerous state and central levies and pave way for consolidation which can tone down the severe competition.

TRAI proposes to relax norms – To Boost M & A / Spectrum Sharing

Telecom regulator TRAI, has proposed change in cap on combined market share for merged Telecom entities from existing ceiling of 40% of subscribers/ revenues to 60%. While, the mergers of telcos aggregating to combined market share of 35% has been proposed to be brought under Automatic Route, mergers resulting in telcos with combined share of 35% – 60%, will require TRAI to appraise possibility of abuse of resulting dominance and approval by the Government.

The relaxations theoretically imply that any telco in India can merge with another as the combined market share Bharti Airtel and Vodafone, top two Indian telco’s is 51% which is well within the proposed norms. This may also prove to be a Cash Bounty for 11 telco’s that got pan-India licence for Rs.1, 658 crore in 2008, if they are able to wriggle out of shadow of Spectrum Scam. It is worth mentioning that while the TRAI has reiterated valuation of 2G licence at Rs. 10,972.45 crore, this may not affect the 11 telco’s which got licence in 2008.

TRAI has also proposed to allow spectrum sharing to the extent of 25% of aggregate air waves. This is perceived to be an immediate boost for the sector with highly skewed spectrum usage, with established players facing significant congestion on their networks and new entrants still struggling to get the traffic in extremely competitive environment.

TRAI has also proposed to continue with revenue sharing of 6% as against 8.5% recommended by Department of Telecom. To further boost penetration of telecom to bottom of pyramid, revenue sharing is proposed to be relaxed by as much as 66% for villages having population of less than 500.

These changes, may set a new turf for telecom sector in India reeling under cut throat competition, while it may not be such a good news for retail consumers who may have to foot a larger bill in days to come. Continue reading

Kingfisher denies any fresh restructuring

Ravi Nedungadi, President and CFO of the UB Group, has denied any plans for another round of debt restructuring for Kingfisher Airlines but said that the airline has sought lenders’ help to substitute high-cost rupee borrowings with low-cost foreign current debt. He further added that the company has only sought to “appraise working capital requirements in the usual course, to account for changes in international prices of fuel and the change in rupee-dollar parity,”

“The banks are in active consideration of these requests and there is absolutely no question of another debt recast,” he added.

The airline is seeking to substitute, high cost rupee debt with lower cost foreign currency borrowings, to the extent the same can be serviced by its international operations. The arrangement will also provide a natural hedge against foreign exchange exposure of the airline. The company is also learnt to be seeking Non Fund Based assistance to substitute Cash Reserves given for leases and maintenance contracts by Bank Guarantees, for unlocking significant cash pile for boosting operations.

PNB starts restructuring loans to state electricity boards

Amid rising concerns about funding for the power sector, public sector lender Punjab National Bank (PNB) has started restructuring loans doled out to state electricity boards, many of which are deep in the red.

Even though banks are exercising caution on lending to the power sector, PNB today said it would continue to provide funds for existing power generation projects.

Responding to a query on lending to State Electricity Boards (SEBs), PNB’s Chairman and Managing Director K R Kamath said, “What we have done is that wherever we had issued the SEBs short-term loans we have restructured and converted it into long-term loans repayable over a period of time…”

“These instalments are coming regularly to us now. We have been a little proactive in handling this portfolio,” he told reporters while announcing the bank’s second quarter results.

Going by projections, power distribution companies (discoms) incurred a staggering loss of Rs 70,000 crore in 2010-11.

According to Kamath, PNB would continue to provide funds for projects which are getting implemented.

As per estimates, PNB has an exposure of over Rs 12,000 crore to the power sector.

Apart from poor financial health of SEBs, coal supply issues and environmental hurdles are hurting the Indian power sector. Against this backdrop, many lenders are understood to be very cautious in extending loans to the sector, which is expected to see a capacity addition of nearly 1,00,000 MW in the 12th Five-Year Plan (2012-17).

Last month, rating agency Crisil cautioned that lenders would be risking about Rs 56,000 crore unless government brings about urgent reforms in the power sector.

Source : Economic Times

Banks Look to Restructure Power Sector Exposure

State Bank of India and ICICI Bank are among the dozen lenders staring at the possibility of restructuring loans to the crisis-hit power sector that has been hobbled by state electricity board defaults and delays in new projects.

A sector that only a few years ago was a gold mine of opportunities for investors and lenders, is turning out to be an unwanted child with both private equity investors and lenders. So far this fiscal, private equity investment in the sector has halved while lending has slowed to a trickle due to a number of reasons.

At least for the record, no power producer has defaulted so far, but the state of affairs has begun to ring alarm bells with some estimates showing that losses on loans could squeeze the banking system and revive memories of what happened when the textile industry went through a similar crisis in the 1990s.

For some, it is like revisiting the nightmare of Dabhol Power after its parent Enron went bankrupt in 2001. The RBI is inspecting banks to assess the potential damage. “So far, there have been no delinquencies as the projects are in the implementation stage, and if there are any stress, banks will restructure the accounts at the individual level,” said Romesh Sobti, chief executive at IndusInd Bank that has loaned Rs 895 crore, or 8.9% of its total loans, to power sector.

“State electricity boards have always been in bad financial health, however, they carry a sovereign guarantee, hence the chances of default are very less.” ICICI leads the list of banks with the highest exposure to the power sector.

It has given Rs 37,233 crore, or 5.9% of its total book, followed by State Bank with Rs 36,915 crore, or 2.5% of its total book. Axis Bank ranks third with Rs 17,110.60 crore, or 5.7%, annual reports of all the banks show. State Bank and ICICI Bank officials declined to comment, citing silent period ahead of their quarterly earnings.

“Our power sector book continues to perform satisfactorily,” said an Axis Bank spokesman. “The projects are progressing as per schedule and most of them are expected to become operational over the next 2-3 years. With the longterm outlook positive, the portfolio is expected to perform satisfactorily….”

Lack of major reforms in the power sector is hurting the economics of the industry. In most cases, the state-owned electricity companies are monopolies in distribution, and sell power at heavily subsidised rate to consumers, especially farmers.

Years of uneconomical operations have pushed many, such as Rajasthan and Tamil Nadu’s distribution companies, into losses, followed by default to power producers. The state-owned power distribution company in Tamil Nadu has seen its losses rise to Rs 38,000 crore in fiscal 2011 from Rs 4,900 crore in 2006. Its debt is up at Rs 40,300 crore from Rs 9,300 crore over the same period.

“Structural reforms are required in the transmission and distribution,” said RK Bansal, executive director, IDBI Bank Ltd. “State regulators will have to make sure that they increase tariffs as fast as they can. The delay is largely in new power projects.

In one case, there has been a delay in implementation which can be handled.” Scores of power projects, including JSW Energy and Reliance Power, are also facing delays due to nonavailability of fuel, such as coal and gas, and land acquisition. The government’s flip-flop in mining, and environmental policies have also hurt.

Some, such as Tata Power and Adani Power, are importing coal, but even that is becoming unviable given the surge in coal prices. These issues may manifest themselves as losses to banks.

Economic Times

Sugar and Textile companies owe banks $35 billion: RBI data

For Indian sugar and cotton textile companies, October 1 marks the start of a new marketing year. And the beginning of slow, measured panic in their bankers.

Together, the two industries currently owe banks an eye-watering $35 billion, according to latest RBI figures. That is 20% more than what they owed last year. And beats by far the $24 billion banks have lent to the commercial real estate sector.

Unfortunately, banks don’t have a hope in hell of recovering their money this season. Take sugar. Mills are borrowing frenziedly to pay farmers for sugarcane. Last year, out of the industry’s total revenue of $16.43 billion, cane payments swallowed $11.40 billion.

This year will be worse. Cane is more expensive but sugar sales will slacken because mills are saddled with enough left over to supply India for three months, with another bumper crop expected over the next 12 months. Ex-mill prices shall stay subdued because the government tells mills how much to sell each month and ensures it exceeds demand.

Exporting the extra sugar is a logical solution. But as trade is regulated by a government more spooked by inflation than bad loans, all marketing decisions are out of corporate hands. Textile companies are in equal misery.

Confederation of Indian Textiles Industry says more than 60 companies, including Vardhaman, Raymonds, Lakshmi Mills and Nahar Mills, have reported net quarterly loss for the first time. The number of defaulters in the $62-billion industry is rising as managements beg banks to restructure working capital loans.

The decline in fortunes was so dramatic that it caught everyone by surprise. Till December 2010, life was good. A fifth of Indian yarn and a third of the cotton is surplus, for which China was willing to pay crazy prices.

Companies began buying every bale in sight to spin and process for China. Average operating profits inched towards 20%, the highest in three years. Then government busted the rave by banning exports in January. Suddenly the yarn and fabric made from extremely expensive cotton and bought through high-interest loans had no takers.

By April, prices crashed 50%. Today, spinners are struggling to recover cost of production. Clothing exporters are hit by sluggish demand in USA and Europe. Mills are running at 30% capacity. Most companies are entangled in disputes over contract defaults.

Those willing to settle have taken huge ‘haircuts’. Basically everyone is broke. Though exports have resumed, the new season brings no succor. There are no export orders.

Chinese demand is flagging because customers in the West are hit by recession. Globally, cotton is so abundant that futures contracts on Nymex are declining as the months go by. The December 2011 contract is at 99 cents per pound, the March 2012 contract is at 96 cents, the July 2012 is 94 cents and the October 2012 is also 94 cents.

Anyone foolish enough to stock cotton or yarn won’t recover even godown rent. India is expected to produce record 6 million tonne cotton, though mills can use only 4.5 million tonne. Who is responsible for this mess? Quite clearly, it is Udyog Bhawan and Krishi Bhawan’s creation.

By continuously meddling in every aspect of business – price of raw material, production, sales, exports, and inventory management, government has left managers in crop-based industries helpless and clueless. Analysts can predict commodity market risks, not political whimsy.

The gvernment influence operates in other insidious ways. In the guise of promotion, for years, government has pampered inefficiency, lethargy and unviable investments. Sick sugar mills are kept alive by frequent interest subventions. I

ndia now has the capacity to produce 30 million tonne of sugar without either the cane or the consumption to support it. No wonder insolvency is rampant. In textiles, life is more bizarre. On the one hand, industry is seeking loan restructuring.

On the other, it is encouraged to borrow more through subsidies on each loan. With another Rs 15,000 crore dangling under the Technology Upgradation Fund Scheme, can you blame businessmen for greedily announcing new factories that become white elephants? Their survival is totally dependent on continued sarkari largesse.

Unfortunately, when government runs a protection racket, banks are left holding the can. Such bad loans are India Inc’s real misery index. The genuinely loan-worthy balance sheets will emerge only after sugar industry is decontrolled and textile industry is taken off the incentive drip-feed.

Investment flows automatically into an inherently viable industry. So does credit. It is time harried bankers forced government to realize this first principle of business.

Economic Times