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July 19, 2017

Haircuts worth Rs 2.4 lakh crore

That’s what banks may need to resolve the top 50 stressed accounts

India’s banking sector is currently under stress with non-performing assets (NPAs) rising to Rs 8 lakh crore as on March 31, 2017, or 9.4% of total outstanding loans, from Rs.6.1 lakh crore as of March 31, 2016.

The government and the Reserve Bank of India (RBI) have taken many steps and offered various resolution tools such as the corporate debt restructuring (CDR), strategic debt restructuring (SDR), the 5:25 scheme, and the Scheme for Sustainable Structuring of Stressed Assets (S4A) – all to little or no avail.

The unwillingness of banks to take it on the chin through haircuts has meant the can have been kicked down the road, which has, in turn, resulted in debt ballooning to unsustainable levels.

The government then recently promulgated an ordinance empowering the RBI to issue directives for a faster and optimum resolution of stressed assets so that they become viable. The focus now is on the optimum level of debt reduction and potential transfer of assets to a different management that can bring in the resources needed to scale up cash flows.

In this study, CRISIL has estimated the level of haircuts required for 50 large stressed assets with a cumulative debt of over Rs 4.3 lakh crore – representing about half of the gross NPAs of the banking sector. The analysis shows these 50 large stressed assets may have to take haircuts of ~60% at an aggregate level, to arrive at a sustainable level of debt. CRISIL has classified the haircuts into four categories – marginal (<25%), moderate (25-50%), aggressive (50-75%), and deep (>75%). The economic value method has been applied to arrive at the sustainable level of debt.