Despite the government putting in place minimum import prices for steel and GDP growth picking up modestly in the September quarter, the latest data from Credit Suisse shows the debt position of Indian banks continues to worsen—while gross NPAs plus restructured loans rose from 6.8% of all loans in FY11 to 11.5% in FY16 and 12.4% in Q2FY17, Credit Suisse reckons this is nearer 16.5% once the unrecognised stressed loans are taken into account. As a result, there are likely to be few loans that qualify for relief under RBI’s S4A restructuring scheme since, under the guidelines, after the restructuring, at least half of the remaining debt needs to be sustainable. None of this should come as a surprise since, while it is true sales of all firms have risen in sync with GDP growth, most highly-indebted firms by definition are poor growth firms—according to Credit Suisse, while aggregate corporate ebitda rose 9% on a y-o-y basis in Q2FY17, for companies with an interest cover (IC) of less than one the ebitda contracted 24%. As a result, 40% of corporate debt today is with firms with an IC of less than one—and for 38% of this sample, this has been true for the last 12 quarters.
In the steel sector, despite the minimum import price regime being extended, the stressed companies kept seeing net profits plummet or losses widen—as a result, between Q1FY17 and Q2FY17, the share of debt with stressed firms, defined as those with a debt-to-ebitda of more than 12, rose from 53% in Q1FY17 to 61% in Q2FY17. Despite the relief provided under UDAY, the continuing drop in plant load factors—to 53.5% in Q2FY17—and the fall in merchant power tariffs to below R2.5 per unit resulted in ebitda falling for all large companies. As a result, 63% of all debt is with companies that have an IC of less than one—this was around 43% in Q4FY16. The ongoing tariff war in telecom that resulted from RJio’s entry has meant that, after removing Bharti Airtel, the sector made a loss of R1,300 crore in Q2FY17, with an ebit of R1,100 crore and interest expenses of R3,000 crore—52% of telecom debt is held by firms with an interest cover of less than one, up from about 33% in Q1.
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For a government that is grappling with the impact of demonetisation and looking at growth slowing till at least March 2017 as a result, the banking crisis getting worse is bad news. While the chances of a windfall gain of R2-3 lakh crore from black money getting extinguished are now pretty much zero, any money that the government collects by way of higher taxes due to money being laundered or due to new income disclosure scheme just has to be spent on recapitalising banks—if this is not done, the PSU banks’ ability to lend will only get compromised further. This means the government must give up any plans it had of pumping in any of its demonetisation largesse into the hands of the poor through channels like the Jan-Dhan accounts.