Potentially Rs 2.6 trillion of corporate and SME loans (3.2% of total bank credit) will be recognised as stressed loans by FY19. Indian banks are sitting on unrecognised stressed loans worth of Rs 7.7 trillion, a report by India Ratings and Research (Ind-Ra) said today.
The India Ratings study pegs stressed corporate and SME debt at 22% of total bank credit. While a sizeable proportion of the unrecognised stressed exposure has strong group linkage or some form of parental support, potentially half of it could further slip in the next 12-18 months. The recognised stressed corporate and SME loans in the system stands at around 12% of total bank credit.
India Ratings highlighted in the report ‘FY18 Bank Outlook: Long Tail of Credit Costs to Subdue Profitability Despite Plateauing Stressed Assets’ that impaired assets will peak at 12.5%-13% by FY18/FY19. Credit costs, however, will show an extended recovery period (FY18F:185bp; FY16:230bp), as a large proportion of recently acquired higher-bucket non-performing loans keep aging. This will keep the return on assets (RoAs) for public sector banks and private sector banks at around 20bp below their respective long-term medians.
India Ratings estimates that out of the total unrecognised stressed book that banks are sitting on, around 1.8% is to stressed public sector units, around 2% of it either enjoys some group support and could flow to joint lender forum or would be subject to asset sale, around 2.9% could be the addition to the restructured book from infrastructure projects and 3.2% is the potential slippage in next 12-18 months.
The sector-wise break up of stress shows some interesting findings; the sectors which0 have the highest unrecognised stressed exposure include infrastructure, power, telecom and real estate, among a few other sectors. While the iron and steel sector has seen lot of stress recognition in the Asset Quality Review exercise conducted by the Reserve Bank of India in the last fiscal, provisioning continues to remain inadequate considering higher loss given default estimates. Some sectors including infrastructure, real estate among others have lower amount of stress recognised as in many cases they enjoy group support.
The latest annual reports of some banks which have disclosed divergence in bad assets recognition by the bank compared to RBI’s disclosure, shows that a significant portion of the unrecognised bad loans in the system will start trickling in the next 12-18 months.