Lead Story

Bad debt or death bed?

Evergreening of loans is keeping several over-leveraged companies alive. What could be the endgame?

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Published 5 years ago on Dec 14, 2015 22 minutes Read

Just a year before liberalisation, a few enterprising men decided to enter the business of steel making. These men borrowed monies from banks and then kept on borrowing. One fine day, the bankers realised that the promoters had no way of making good on their debt obligations. But accepting financial loss — or losing face, for that matter — was not an option for these banks.

So, the largest lender called upon the other smaller banks and told them to ease the payment obligations so that the loan remains good. A smaller bank was willing to accept the loss and did not want to support these enterprising men anymore but the largest bank used its mighty clout and made almost all of them fall in line. Is this a true story or a figment of someone’s imagination? Your guess is as good as ours.

Recently, HDFC Bank sold its Essar Steel exposure of ₹550 crore to an asset restructuring company, while an SBI-led joint lenders’ forum restructured the company’s ₹30,000-crore exposure. Reports suggest that the loan was sold at a 40% discount. Industry insiders believe that refinancing and rolling-over are going to be commonplace in the banking system, which is short on ideas but big on its set of problems.

In a study of highly leveraged business groups, analysts at Credit Suisse say that $15 billion worth of long-term debt is due next year and would need to be refinanced. Additionally, another $20 billion of short-term debt would need to be rolled over. With these stressed groups’ total outstanding loans at a staggering ₹730,000 crore (see: India’s debt and mighty), banks will have little or no choice but to support these groups’ debt-ridden balance sheets. With some of the banks already stretching to meet the Basel-III capital requirements, supporting these groups would put additional burden on their capital base.

India's debt and mighty

Debt servicing ability has worsened for most business groups

According to Saurabh Mukherjea, head of institut

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