There are several groups in India, especially in infrastructure, where leverage is definitely upwards of 2.5-3 times
Corporate India’s 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 there’s 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 India’s 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 CRISIL’s 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 bank’s 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