India Ratings, a Fitch associate, estimates that one-fifth (21% precisely) of the total bank credit is stressed. Total bank credit at the end of March 2016 stands at Rs 70 trillion (lakh crore).
Ballooning bad debts are staring in the face of Indian banks. The stressed loans with domestic banks are expected to be above a whopping Rs 13 trillion (one trillion is equivalent to one lakh crore), surpassing the size of many economies around the globe.
India Ratings, a Fitch associate, estimates that one-fifth (21% precisely) of the total bank credit is stressed. Total bank credit at the end of March 2016 stands at Rs 70 trillion (lakh crore).
For the financial year 2015-16, banks are expected to report Rs 9.3 trillion bad loans, but this does not fully recognise the complete stress in the banking sector, say banking experts.
Abhishek Bhattacharya, director at India Ratings, said, "The unrecognised stressed debt is the danger that banks face. It will be prudent for banks to recognise this debt and set aside capital for it. We expect banks to report Rs 9.3 trillion loans, but this camouflages the actual problem."
For instance, a Credit Suisse report released earlier this year said that out of the $58 billion debt, about $29 billion is chronically distressed but banks have only recognized $6 billion of the debt as bad loans.
India's infrastructure and the metal sector account for 60% of the total bank debt. The power sector, iron and steel sector, cement and textiles are all distressed due to policy hurdles, dumping of cheap steel on Indian shores by foreign companies, and a gradual decline in export demand. But the bigger problem has been the over-leveraging by Indian companies and careless lending practices by banks.
Loan growth of the power and steel sectors also continues to remain strong, accounting for 60% of the year-on-year incremental loans to the corporate sector as of December 2015.
The resolution of the stressed assets will need haircuts (reduction in an asset's value), which means giving up on the interest or the principal. Credit Suisse said in its report on corporate debt, "While the government has been taking policy measures, these need to be supported by the right sizing of debt as significant over-leverage is now visible in stressed companies. For example, power plants having witnessed 40-60% cost overrun would need break-even tariff of Rs 4-6 per megawatt, which is well above the current merchant tariff and the rate as per their Power Purchase Agreements. Therefore, we believe that despite a surge in impairments, corporate asset quality stress for banks is yet to peak."
If the results of India's two large private banks, ICICI Bank and Axis Bank, are anything to go by, then the bad loans for banks are only set to rise by alarming proportions. The public sector banks which are yet to announce their fourth quarter numbers are also expected to be stung by a spate of stressed corporate loans.
ICICI Bank, India's largest private sector bank by assets, put Rs 44,000 crore of its corporate loans on the watch list. Five concern areas of the bank -- the power, iron and steel, mining, cement and rigs were under intense scrutiny of the bank. Total exposure in these five sectors was at Rs 57,894.2 crore. Axis Bank, a much smaller bank in size, put on the watch list of Rs 22,600 crore of corporate loans and it expects 60% of these loans to turn bad in the coming quarters.
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