Banks are likely to take a haircut of 60 per cent, worth Rs 2,40,000 crore, to settle 50 large stressed assets with debt of Rs 4,00,000 crore, rating agency Crisil has said. 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.
In banking parlance, haircut is the difference between the market value of an asset used as loan collateral and the amount of the loan. The amount of the haircut reflects the lender’s perceived risk of loss from the asset falling in value or being sold in a fire sale. Banks have already provisioned for 40 per cent of this exposure. “We used the economic value approach to assess the haircuts,” said Pawan Agrawal, chief analytical officer, Crisil Ratings. “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.”
It has classified the haircuts into four categories — marginal (less than 25 per cent), moderate (25-50 per cent), aggressive (50-75 per cent), and deep (greater than 75 per cent). A quarter of the debt analysed needs marginal or moderate haircuts, while a third needs aggressive, and nearly 40 per cent deep haircuts. “Companies from the power sector would require moderate haircuts, while those from the metals and construction sectors would need aggressive ones,” Agrawal said.
In the metals sector, the aggressive haircut would be Rs 1,13,000 crore and deep haircut Rs 12,000 crore. In the power sector, marginal/ moderate haircut would be Rs 37,000 crore, aggressive Rs 19,000 crore and deep haircut Rs 12,000 crore. For construction, deep haircut would be Rs 78,000 crore, moderate haircut of Rs 23,000 crore and aggressive Rs 5,000 crore.
The sources of stress are policy or demand (power plants), lower capacity utilisation (steel plants), and over-leveraged balance sheets (construction companies). 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 underscore 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. Majority of the debt requiring deep haircuts belong to companies with unsustainable businesses so asset sales are necessary to recover monies. Ramesh Karunakaran, director, Crisil Ratings said, “Some of these assets offer M&A opportunities for companies with strong credit profiles. Also, potential synergies could allow for a significant reduction in haircut – an aspect that has not been considered in our analysis.”
It would be in the larger interest of the economy to pop the bitter pill of haircut than kick the can down the road, it said.
Given the issues faced by many of the companies, the haircut required may be on the aggressive side. The haircut levels may be further impacted by the fact that a large number of stressed assets may be put on the block by lenders, making it effectively a buyer’s market.