Large corporate houses involved in power and infrastructure projects and carrying high levels of debt are likely to be the next source of trouble for banks.
The lenders, which have so far seen asset quality issues on account of rising delinquencies in agriculture, small & medium enterprises (SMEs) and mid-tier corporates, may be in for greater stress due to deteriorating debt-servicing capability of large corporates, indicates a Credit Suisse study.
According to the foreign brokerage, the aggregate debt burden of the country’s top 10 debt-ridden corporate groups – Reliance ADA, Essar, Adani, Vedanta, GMR, GVK, Jaypee, JSW, Lanco and Videocon – has increased more than five-fold in the last six years and now stands at nearly 12% of the overall banking commercial credit.
Experts believe rising debt levels, along with slower profit growth and falling rupee, could worsen the debt servicing capability of these indebted groups.
“The debt levels (of the top 10 groups) are up another 15% even as profitability continues to be under pressure. For most of them, the debt increase has outpaced capex and asset sales are yet to take off. The rising stress is visible with some loans of Lanco, JP Associates and Reliance ADA group already being restructured,” Asish Gupta, Kush Shah and Prashant Kumar of Credit Suisse said in a note last week.
The debt servicing ratios of most of the firms have already deteriorated significantly in the last one year with interest coverage ratios for groups such as Essar, GMR, GVK and Lanco already falling below one.
This stress is likely to get more severe going forward, given that currently capitalised interest for most of these companies is 30-250% higher. Moreover, 40-70% of many of these groups’ debt is forex-denominated.
“With rupee depreciation of 6.7%, the increase in liabilities on account of the currency depreciation was larger than fiscal 2013 profit after tax for firms like Reliance ADA and Adani that have high foreign loan exposure. With the currency down another 12% year to date, debt stress should now be even higher,” the Credit Suisse trio noted.
This debt stress, in turn, is likely to savage banks’ asset quality further, believe experts.
“While Indian bank NPAs have already moved up from 2.5% to 4% of loans, most of these have been on account of rising delinquencies in agri, SME and mid-corporates. Large corporate non-performing loans are still low. But as a study of these ten groups reveals, the over-leverage in the large corporate segment is high and is a potential source of additional asset quality stress for banks,” said the Credit Suisse analysts.
A banking analyst with a large domestic brokerage said that all the big industry players whose debt-to-equity ratios have risen by more than five times, could create trouble for the banking sector. “It highly depends on when the RBI reverses the liquidity tightening measures. If conditions persist for more than a month, then asset quality issues may accentuate,” said the analyst.
Though the Reserve Bank of India and the government maintain that these tightening measures are temporary in nature, the markets fear that tougher measures cannot be ruled out in case the rupee fails to stabilise.
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