Stocks of over-leveraged firms tumbled on the bourses on Wednesday with investors spooked by the Reserve Bank of India’s (RBI) decision to allow a clutch of a companies to be liquidated, if no other solution is found. The RBI said on Tuesday it had identified 12 stressed accounts that banks must resolve with the help of the Insolvency and Bankruptcy Code (IBC). The accounts identified by the RBI are those to which lenders have an exposure of over Rs 5,000 crore and where more than 60% of the amount has been classified as non-performing. Merely referring the cases under IBC may not imply immediate liquidation, but if creditors are unable to come up with an alternative solution, a liquidation will take place. In addition, banks would need to come up with plans to resolve another set of stressed accounts in the next six months. The total quantum of non-performing assets (NPAs) is estimated at close to Rs 7.7 lakh crore, nudging 10% of total loans. The total quantum of impaired loans is estimated at Rs 12 lakh crore or nearly 15% of total loans.
“Investors were probably not expecting that some of these companies may be wound down so soon,” said an analyst. He added the speed with which the government and the central banks were working to sort out the NPA problem had surprised everyone.
Companies such as Bhushan Steel and Lanco Infratech each owe banks close to Rs 44,500 crore. IVRCL and Electrosteel Steels are saddled with debt of over Rs 10,000 crore each, while Alok Industries has borrowed more than Rs 22,000 crore.
Losses at debt-laden companies such as Adani Power, Lanco Infra and JP Associates widened in 2016-17.
In a recent analysis, Credit Suisse observed the overall stress levels in corporate India remained unchanged in Q4FY17 with debt having interest cover of less than one still at 40%.
“Corporate profitability continues to be subdued and the aggregate interest cover is down to a low of 2.1,” analysts at the brokerage wrote.
They pointed out the weak companies continue to become weaker — companies with an interest cover of less than one saw their earnings before interest, tax, depreciation and amortisation fall 35% year-on-year in Q4FY17. Moreover, the share of debt with loss-making companies rose to 36% from 32%.
Among the most troubled sectors, bankers say, are steel, power, telecom and textiles. On Wednesday bankers met the government to discuss the troubles in the telecom industry. While steel companies have fared relatively better in Q4FY17, swinging from a loss to a profit, many of them nonetheless have large accumulated losses.