India's banks face disaster from restructured loans

Restructured loans are failing to secure payments for massive debts and will instead balloon to a massive US$39 billion in the fiscal year ending March 2013.

This will represent a huge 71% jump from the US$23 million a year earlier, said Crisil Ltd., the Indian unit of Standard & Poor’s. That means that 5.7% of India’s total bank loans will have been restructured over a two-year period.

Bankers are wary that the rise in restructured loans will lead to deterioration in asset quality. This problem is particularly acute among i state-run lenders this year, including State Bank of India and Punjab National Bank.

Restructured loans give borrowers a moratorium on payments, longer maturities or lower interest rates. Existing guidelines allow banks to restructure loans for debtors who don’t have viable plans to improve cash flow, delaying the inevitable collapse, but saddling lenders with even more non-performing loans.

Crisil estimates that companies might default on as much as US$9.5 billion of restructured loans. The increase in the volume of restructured debt means that stressed assets, including restructured debt and gross nonperforming loans, may climb to a 12-year high of 11% of total loans for Indian banks in the year ending in March.

Restructured debt accounted for 5.9% of outstanding standard loans at state-controlled lenders as of the end of March, according to the RBI. The ratio was 1.08% on average for the biggest private-sector banks, including ICICI Bank Ltd. and HDFC Bank Ltd., and 0.14% for foreign lenders operating in India.