The Financial Stability Report has cautioned banks against loaning to highly leveraged corporates and said that default by just top three borrowers can result in 13 per cent losses.
The report also noted the contribution of large borrowers to the total bad loans and restructured accounts, which crossed 11.3 per cent of the system, is a whopping 87 per cent as of September quarter, up from 78.2 per cent a year ago.
“Corporate sector vulnerabilities and the impact of their weak balance sheets on the financial system need closer monitoring,” Reserve Bank Governor Raghuram Rajan, who is also the Financial Stability and Development Council Chairman said in the foreword to the report.
The report, which was released yesterday, has analysed the current trends in debt servicing capacity and leverage of weak companies till the September quarter using a select sample of 2,368 non-government non-finance (NGNF) listed companies.
The report identified engineering, steel and cement companies as the biggest worry areas.
The analysis shows 4,635 (23.8 per cent) public limited companies and 61,557 (24.1 per cent) private limited companies are weak. Their debt to equity ratio declined from 3 in 2012-13 to 2.2 in 2013-14 in the case of public limited companies and to 1.4 from 1.5 in the case of private limited companies.
The proportion of bank borrowings in total borrowings was about 49 per cent for public limited companies and 43 per cent for private limited companies. The share of bank borrowings of the weak public limited companies constituted 32.1 per cent of total bank borrowings of the group.
Similarly, the report noted that the share of bank borrowings of weak private limited companies out of total bank borrowings of all private limited companies stood at 32.5 per cent in 2013-14.
In case of public limited companies, the share of bank borrowings of leveraged weak companies in total bank borrowings was 22.6 per cent and for private limited companies this was 22.8 per cent.
In case default by weak NGNF companies could be about 10.4 per cent of total bank credit, while it could be about 7.3 per cent in case of assumed default by leveraged weak NGNF firms.
The credit extended by scheduled commercial banks to all NGNF companies was about 32.4 per cent of total bank credit as at end March 2014.
However, a portion of bank credit to these companies could already be a part of the existing stressed advances (non-performing advances or restructured standard advances) of banks, it said.
According to the report, the gross non-performing advances of banks rose to 5.1 per cent as of the September quarter from 4.6 per cent in March 2015.
Banks’ net NPAs as a percentage of the total net advances increased to 2.8 per cent as of September from 2.5 per cent in March.
“While adverse economic conditions and other factors related to certain specific sectors played a key role in asset quality deterioration, one of the possible inferences could be that banks extended disproportionately high levels of credit to corporate entities / promoters who had much less ‘skin in the game’ during the boom period,” the report said.