High leverage levels and huge foreign currency debt have made more than half of the 500 biggest corporate borrowers vulnerable to a sharp fall in the rupee with 37% of foreign currency borrowings likely to get adversely affected, according to the Indian arm of global ratings agency Fitch Ratings.
According to the rating agency’s estimates, the outstanding foreign currency debt of the 500 companies was around Rs 4 lakh crore as of end-March 2014, out of which 37% would be hit more due to rupee depreciation.
The rupee has slipped around 4% in financial year 2014-15 and has fallen another 6% thereafter. The currency ended at 66.46/$ on Wednesday. Forecasts of a further fall of the currency are gaining momentum owing to the looming possibility of a rate hike by the US Federal Reserve.
Given unhedged exposures of companies, Indian banks face a bigger risk on their loan book and may have to face higher provisioning due to the Reserve Bank of India’s norm that mandates capital buffer for such unhedged exposures.
Jefferies India estimates that all banks have an exposure of 15% of their networth to high-risk companies whose earnings before interest and depreciation could reduce more than 75% due to currency risk.
The company has also warned that banks such as IDBI Bank and YES Bank have a higher exposure and are more vulnerable than the rest of the banks.
India Ratings observed a marginal improvement in the number of companies that could manage a rupee depreciation shock given their positive sensitivity towards such a event.
“Corporates with negative sensitivity (which is the percentage change in absolute EBITDA for 1% depreciation of INR) declined marginally, while corporates with positive sensitivity improved marginally between FY12-FY14,” the agency’s report said.
India ratings has assumed a fall of 5-10% for the rupee in the event of the US Federal Reserve raising rates at its meeting this week.
Within the 500 companies, not all exporting companies gain from the depreciation of the rupee. Textiles firms and automobile manufacturers benefit the least while gains for the pharma and IT sector are also reducing, the agency said.
“The efficiency of earning FX of IT sector has been decreasing since FY12, while for pharmaceutical it has been decreasing since FY13,” the report said.