Corporate credit stress is reflected by the Indian banking system’s gross non-performing assets (NPA) and restructured loans, according to India Ratings & Research

India Ratings & Research (Ind-Ra) expects corporate credit stress for FY14 to be at levels comparable to FY13, under its base-case. However, in a stress case scenario, the levels could be significantly higher and are likely to be driven by 22 corporates (in BSE 500), with outstanding adjusted debt (including guarantees) of around Rs1,267 billion. The levels could be even higher if the currency depreciates further. Corporate credit stress is reflected by the Indian banking system’s gross non-performing assets (NPA) and restructured loans.

As in the past, Ind-Ra’s sector-specific outlook has provided substantial early warnings with respect to corporate stress levels. The agency’s corporate sector ‘credit outlook for 2013’ covers 22 sectors, including infrastructure. For the purpose of this analysis, the sector-specific outlook is mapped to the outstanding industrial loans of the Indian banking system.

Around 30% of the industrial loans in Indian banking belong to the sectors which are on a negative or stable-to-negative outlook. The proportion of industrial loans in sectors with a negative outlook shot up in 2012 to 28% of outstanding credit (2011: 6%). Gross NPA rate increased to 2.8% in FY12 (FY11: 2.3%), subsequently rising to 3.7% in Q3FY13.

Apart from these 22 large corporates, the overall quality of industrial loan assets in FY14 will be driven by the current status of the industry and impact of the six ‘Risk Radar’ factors identified by Ind-Ra. The factors are: a) foreign exchange, b) investment in pre-election year, c) possible benefits of commodity price correction, d) domestic private consumption, e) interest rate transmission and f) export levels. The single most important factor limiting corporate stress level at the FY13 levels is the assumption that the rupee-dollar exchange rate will remain between Rs53 per dollar to Rs56 per dollar. If the rupee depreciates (for a sustained period) significantly above the Rs56 per dollar level, gross NPA levels may shoot increase significantly above the FY13 levels.
 

Global risk aversion may be creeping up, as signalled by a rise in sovereign credit default swaps spreads. A further rise in global risk aversion, driven by a possible curtailment of quantitative easing, may severely impact the rupee-dollar exchange rate. Enhanced risk aversion in the past has often resulted in a reduction of exposure to emerging market assets by global investors. Given the sovereign’s higher dependence on forex inflows to fund the current account deficit, any such scenario may potentially depreciate the rupee to unseen levels. In such a scenario and given the impending volatility which comes with it, corporate stress level may be significantly higher than the FY13 levels.