Column : Indebtedness Inc

Written by Ramraj Pai | Updated: Sep 10 2012, 06:42am hrs
There are several groups in India, especially in infrastructure, where leverage is definitely upwards of 2.5-3 times

Corporate Indias mounting debt and its trouble with servicing its liabilities is causing worries for bankers. Our analysis shows rising signs of stress reflected in the increase in the banks advances to the corporate sector being restructured for 2011-12 and 2012-13. We have sharply hiked the estimate for restructured assets for the above-mentioned period from approximately R2 trillion in April to R3.25 trillion in August. The proportion of restructured loans in this period will be high at around 5.7% of banks advances as on March 31, 2013. And unlike the financial crisis of 2008, the average ticket size of restructured assets has amplified manifold. Although CRISIL believes theres no immediate systemic threat to the Indian banking sector, a sustained deterioration in asset quality and earnings may lead to weakening in the banks credit quality.

The sizeable loan restructuring by banks reflects corporate Indias strained credit quality. This surge has been largely caused by increased funding challenges faced by corporates, especially the large and medium-sized corporates with large debt. According to CRISILs estimates, the majority of restructuring will be in loans to the state power utilities (SPUs) and the construction and infrastructure sectors. Other vulnerable sectors include iron & steel, textiles and engineering. While this large-scale restructuring will provide some temporary respite to banks, helping them keep the non-performing assets (NPAs) under control, CRISIL expects the gross NPAs to rise sharply to 3.5% as of March 31, 2013, as compared to around 3% as of June 30, 2012.

At present, there are several groups in India, primarily in infrastructure sector, where leverage is definitely upwards of 2.5-3 times and which account for a significant proportion of banks exposure. This not only covers the debt levels at the holding company level but also comprises the substantial debt sitting in the special purpose vehicles (SPVs), which are one or more levels below the holding company.

While the volume of debt recast is reminiscent of the 2008-09 crisis, the big change is that today the average ticket size of a restructured asset is about R10 billion compared to a meagre R50-100 million then. The current restructuring is qualitatively different from those in 2008-09 and 2009-10. While much of the earlier restructuring was in MSME accounts, the current restructuring is predominantly among the large corporate exposures.

Loans of R1.6 trillion have already been restructured in 2011-12 and in the first quarter of 2012-13. Going forward, the majority of restructuring will be in loans to the SPUs, and the construction and infrastructure sectors. The rise is a result of significantly higher funding challenges being faced by companies with large debt.

We also witnessed rising pressure on credit quality of firms rated by CRISIL, with instances of default shooting to the highest level in the last 10 years of 3.4% in 2011-12. In the first quarter of 2012-13, we saw downgrades continue to outpace upgrades.

The situation is particularly worrisome for SPUs, which are finding it increasingly difficult to raise unsecured short-term funding. This, in turn, is adding to the pressure on their liquidity and ability to service loans. On the other hand, low tariffs have resulted in a huge piling of accumulated losses, which is likely to lead to a significant increase in restructuring of SPU loans, totalling nearly R1.5 trillion. Given the situation, an intervention by the government of India seems likely to be on the cards.

Infrastructure developers are facing problems due to their inability to raise adequate equity in a timely manner. This has strained the balance sheets and financial flexibility of developers in infrastructure and construction sectors, resulting in an increased likelihood of restructuring. However, in this space, we do not see high levels of debt as a major source of risk for companies whose projects have reached a state of stability and enjoy a healthy level of operating cash flows, sufficient to service the debt levels. However, construction companies, which have raised debt-to-fund equity commitments in build-operate-transfer (BOT) projects, appear to be in trouble. A greater risk is emanating from the viability of recently-awarded road projects given the kind of aggressive bidding that was witnessed for them in the past two years.

Despite the challenges posed by the quality of corporate credit, CRISIL believes theres no immediate threat to Indias banking sector. The capital position of the domestic banking sector continues to be healthy. The net worth coverage of net NPAs of the overall banking sector stood at 8 times as on March 31, 2012. The average tier I capital adequacy ratio (CAR) remains healthy, at around 10%, which would enable and facilitate a smooth transition to the Basel III regime commencing from January 2013. Also, the resource profile of the domestic banking sector continues to be stable, with a high proportion of around 60% retail deposits in its total deposit base and a stable CASA base of 34% of deposits.

The banks, however, have sought to arrest the deterioration in asset quality through measures such as strong senior management focus on recovery, setting up dedicated teams for collections, and tightening of underwriting norms. While the banks comfortable capitalisation and stable resource profiles will continue to support their credit risk profiles, any significant and sustained deterioration in asset quality and earnings may lead to weakening in their credit quality.

The author is president, CRISIL Ratings