Indian Corporates under severe debt stress!

Indian Corporates under severe debt stress!

Last updated: 22 Sep, 2020 | 07:38 pm

Indian Corporates under severe debt stress!

Which sectors are under stress?

  • While the Indian economy is limping back to recovery, many sectors have under severe stress due to rising debt.
  •  “According to the latest report released by KV Kamath Committee, 19 sectors which were not under stress before the pandemic but have been hit by it, account for ₹15.5 lakh crore of debt.” Retail and wholesale trade are the worst affected with an outstanding debt of Rs 5.6 lakh crore. 
  • The pandemic has also affected 11 sectors which were already under stress. These sectors have a debt of Rs 22.2 lakh crore. Non-banking financial companies (NBFCs) have the highest, accounting for Rs 7.9 lakh crore, among these sectors. 
  • The tables below show the sector-wise credit exposure of banks with segregation based on stress levels.

Coming NPA wave for banks

  • A stress test conducted by the Reserve Bank of India suggests that the Covid-19 crisis could push Indian banks’ gross bad loans to their highest in nearly two decades (record of 12.7% in March 2000).
  • In this dire scenario, public sector banks remain the most vulnerable. The pandemic will result in bad loan ratios surging to 15.1% for public sector banks and a bigger deterioration in capital ratios. 
  • 'Private sector banks and state-owned banks had an aggregate bad loan burden of ₹8.42 lakh crore as at the end of Q1FY21. According to ICRA, Gross non-performing assets (NPAs) of banks are likely to worsen to 11.3-11.6% by the end of this financial year.'
  • The relief on the moratorium as well as the restructuring of loans by RBI will temporarily help Indian banks exposed to these sectors. However, the pain will be most apparent when stressed borrowers may not be able to pay back loans later, despite the restructuring. Right now all the pain seems to be brushed under the carpet! 
  • Given the financial profiles of the borrowers, the risk of NPAs rising in the long-term is even higher.
  • According to estimates by Jefferies, 30-60% of the loans in Phase-2 would have to be restructured, forming 4-8% of total loans (according to RBI’s restructuring scheme)

Profile of borrowers opting for moratorium

  • Around 2,300 non-financial firms have availed the moratorium announced by the RBI. More than 75% of these had sub-investment grade credit ratings (BB+ or below) according to Crisil.
  • The number of mid-sized companies with a turnover of Rs 300 crore - Rs 1,500 crore opting for the moratorium is three times of those with a turnover of more than Rs 1,500 crore, according to a Crisil report.” 
  • This indicates that the stress faced by small and medium-sized firms is much higher than their larger counterparts.
  • Around 20% companies that opted for the moratorium are in highly impacted sectors such as gems and jewellery, hotels, auto components, automobile dealers, power utilities, independent power producers, energy traders, packaging, and capital goods. These borrowers were from industries that were already facing a dent in their business performance due to the economic slowdown prior to the pandemic.

INDmoney Analysis

  • The majority of loans under moratorium in phase two are carry-overs from phase one, indicating that the new stress is limited. However, the risk of continuing loans is naturally higher, as they have not been paid for 6 months, indicating that the borrowers are under high stress
  • While the loan restructuring scheme and the moratorium is a solid initiative by the RBI, it is pre-emptive of a significant deterioration of business environment in India.
  • Banks have been shoring up capital off late via various means to build reserves to tide through the crisis. Financial institutions will go through a rough phase over the next year.
  • Banks with strong capital adequacy ratio and loan books of healthy borrowers should be able to tide through these difficult times. Large banks have already braced for the worst and provided for the Moratorium. The provisions are expected to go up even further.
  • While the situation has improved as compared to Phase-1, with the spread of COVID gaining pace across the country, further shutdowns continues to be the biggest factor to impede recovery
  • Stick to AAA-rated low duration funds and bonds over high duration funds, and long-maturity bonds as yields will remain volatile in the near future but in the medium term (2-3 years) the rate cycle is expected to bottom out and move up