Bank loans again under bad debt threat, but big companies not to blame this time; risk shifts here

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September 9, 2020 12:06 PM

While lenders in India continue to face risks around asset quality, Moody’s Investors Service today said that corporate loans are not the worst placed this time.

midcap funds, midcap equity mutual funds, midcap funds may give high return when stock market bullish, how to select better midcap funds, how to invest in mid-cap equity funds, best mutual funds, top mutual fund scheme, you should know some important facts before invest in midcap, risk reward in midcap, largecap Vs midcap, who should invest in midcapComing into this credit cycle, Moody’s says that corporate loans for banks are better placed than they previously were.

While lenders in India continue to face risks around asset quality, Moody’s Investors Service today said that corporate loans are not the worst placed this time. Banks continue to be under the spotlight amid the economic contraction aided by the coronavirus pandemic. However, unlike the previous credit cycle where loans to corporate borrowers were resulting in non-performing assets (NPA), Moody’s says retail and SME credit is likely to be worse this time. Banks have so far offered a 6-month moratorium to borrowers across the country and now a restructuring of select loans is in the offing.

Corporate borrowers not immune, but better placed

Although risks aligned with corporate loans might have decreased from the previous credit cycle, they are not immune to the economic contraction and its consequences. Moody’s highlighted that a large number of large and mid-size companies reported EBITDA contraction in the April-June quarter from the previous year. However, sectors like transportation and hospitality which are the most vulnerable in the light of the pandemic but their exposure to banks is small.

Coming into this credit cycle, Moody’s says that corporate loans for banks are better placed than they previously were because of the risk averse nature of the lenders and with most of the weaker corporate loans already categorised as Non-performing loans (NPL). “With exposures to most corporates with weak financial health having been recognized as NPLs, currently performing loans are better placed to withstand stress,” Moody’s said in a research report. Somewhere between 15-20% of the overall corporate debt has already been classified as NPL of which most large corporate loans have been referred for resolutions with banks making adequate provisions.

Source: Moody’s

Additionally, large companies with weak debt coverage ratios have been on the decline. “The proportion of debt with an interest coverage ratio less than 2 has reduced to 12% and 27% for large and medium sized corporates respectively at end March 2020 from 22% and 35% in March 2016,” the report said.

Jobs losses to hit financials of households

On the other hand, Moody’s is predicting that the coronavirus outbreak will strain finances for households and small businesses. “… job losses resulting from disruptions to economic activity and subsequent reductions in household income will lead to a deterioration of retail loan quality,” Moody’s added. The performance of loans to small businesses has already started weakening and the supply chain disruptions coupled with slow demand will make matters worse. Moody’s noted that public sector banks have a large corporate loan share but their lending to SMEs is huge as well. On the other hand, private banks have exposure to consumers more than public lenders.

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