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99% non-MSME companies unlikely to opt for one-time debt restructuring, says CRISIL

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As many as 968 companies, or about 27 percent of the sample set, had opted for the moratorium allowed by RBI, and 98 percent of these said they would not be opting for the restructuring scheme.

99% non-MSME companies unlikely to opt for one-time debt restructuring, says CRISIL
Barely 1% of companies, excluding micro small and medium enterprises (MSMEs) may opt for Reserve Bank of India's (RBI's) one-time debt restructuring, a preliminary analysis by rating and research agency CRISIL showed. The analysis is based on 3,523 non-MSME companies that it rates.
"Improving business sentiment on account of increased economic activity over the past couple of months, and expectation of a sharp recovery next fiscal are persuading borrowers to skip one-time debt restructuring (OTDR)," said Subodh Rai, Senior Director at CRISIL Ratings. The impact on the borrowers' long-term credit history due to their accounts being classified as restructured advances is another deterrent, Rai said, as this could impact their ability to raise debt in future.
RBI had announced the restructuring scheme in early August as a relief measure for non-MSME corporate borrowers having an aggregate exposure of greater than Rs 25 crore who were impacted due to the COVID-19 pandemic.
But CRISIL's analysis suggests that only about 1% indicated that they would apply for it. "This is despite two-thirds of the rated entities being eligible based on the parameters proposed by the KV Kamath Committee set up by RBI," the report said.
Research shows that for almost 44 percent of these CRISIL-rated corporates, more than three-fourth of the debt comprises of short term working capital facilities. Restructuring debt, therefore, would have negligible benefit as the resolution plan under this scheme are focussed on deferring principal repayment of long-term debt, the report found.
"Such borrowers, instead of opting for debt recast, may prefer to seek additional working capital financing as announced by the RBI under its Covid-19 regulatory package," CRISIL said.
As many as 968 companies, or about 27 percent of the sample set, had opted for the moratorium allowed by RBI, and 98 percent of these said they would not be opting for the restructuring scheme.
Sameer Charania, Director at CRISIL Ratings explained, "The recently announced Emergency Credit Line Guarantee Scheme (ECLGS) for the health care sector and 26 other stressed sectors, which allows companies to borrow up to 20% of their outstanding dues, will further dissuade borrowers -- especially those facing temporary liquidity issues -- from opting for debt recast. However, companies that belong to highly impacted sectors such as hotels, retail, real estate, and textiles would still prefer OTDR given their longer business-recovery timelines."
The report added that the number of companies seeking OTDR may increase if sentiment around recovery dampens or COVID-19 afflictions keep increasing, leading to fresh curbs on economic activity.
A recent State Bank of India research report also pointed out that banks were able to convince corporates to not seek restructuring. "We believe, in this scenario what is currently happening is that banks have been largely able to convince corporates not to go for a restructuring given the negative externalities. Much credit should be given to RBI in this context as the six-month moratorium on interest and instalment until August resulted in surplus funds in the hands of borrowers and it gave them confidence to service the debt without any restructuring. Moreover, the additional debt given as emergency funding to all borrowers by banks increased liquidity in their hands," the SBI report noted.
"Assuming 15%-20% of the corporates had opted for moratorium, based on our earlier analysis, the restructuring amount originally envisaged was up to Rs 7 lakh crore. We estimate based on our feedback and granular data analysis that only around 15-20% of the companies, from the said amount, may request for a debt restructuring which by most pessimistic estimates could be a maximum up to Rs 1 lakh crore," SBI said in the report.
So far, SBI has received restructuring requests worth Rs 6,495 crore and it expects another Rs 13,000 crore by December end. Punjab National Bank has similarly restructured loans worth Rs 2,064 crore so far, and does not expect total restructured loans to exceed Rs 20,000 crore by December. Union bank of India has received restructuring requests for loans of Rs 4,200 crore including from MSMEs and retail. ICICI Bank said it had requests to restructure loans of Rs 2100 crore as of September 30, Axis Bank expects to restructure about Rs 9,200 crore of loans.