NPAs of Indian banks have already moved up to 4% of total loans due to rising delinquencies in agriculture, SMEs and mid-corporates. However, according to Credit Suisse, high over-leverage in the large corporate segment could be a potential source of additional asset quality stress for banks
Rising debt levels of top corporate houses, particularly from the Indian infrastructure sector, are expected to put a strain on the Indian financial sector, says Credit Suisse. The worsening economic condition is expected to hit the profitability of the biggest corporate houses hard, such as Reliance Anil Dhirubhai Ambani Group (Reliance ADA), GVK Group, GMR Group and Essar Group, which saw their debt levels soar by 15%, even as economic headwinds and rupee weakness persist.
“Corporate asset quality issues are likely to persist and we continue to remain underweight on the Indian banks despite the recent stock price fall and cautious on corporate lenders such as SBI, ICICI Bank, Yes Bank, Union Bank, Punjab National Bank, and Bank of India,” Credit Suisse said in a research note.
Credit Suisse have analysed ten top corporate groups namely: Adani Enterprises Group, Essar Group, GMR Group, GVK Group, Jaypee Group, JSW Group, Lanco Group, Reliance ADA Group, Vedanta Group and Videocon Group. The debt levels of these companies have collectively increased by an average of 15%. Biggest borrowers Lanco Group, Reliance ADA Group and GVK Group saw their borrowings increase by as much as 24%. Jaypee Group saw their loans increase 19%.
“The increasing stress is visible with some loans of Lanco, Jayprakash Associaties and Reliance ADA having already come up for restructuring,” said the report.
According to the report, Lanco Infratech have begun talks to restructuring Rs7,500 crore of debt, while Punjab National Bank have restructured Rs3,200 worth of Jayprakash Associates’ loans (part of Jaypee Group). Reliance Power has already restructured some of its debt as it expects its 3,960 megawatt (MW) power plant to commission this fiscal.
It is pertinent to note that debt level of some of the companies have even outpaced capital expenditure. This shows that companies are conservative about putting the debt into good use while cash flow continues to be a concern. The infrastructure sector has been badly hit in the last few years as government’s decision paralysis has left many projects stranded, many with high debt outstanding. Nonetheless, it is surprising to note that banks have still issued loans, Credit Suisse said.
According to the report, some of the companies have big repayments coming up in 2014, some of them dollar-denominated repayments. With the rupee under stress, the ability to repay loans in US dollars is likely to be constrained. Many companies have external commercial borrowings (ECBs) maturing in 2014. This includes Essar Oil ($200 million), Essar Steel ($260 million), Reliance Communications ($500 million), Reliance Infrastructure ($250 million) and Vedanta Aluminium ($407 million).
However, the debt servicing levels are poor and have been deteriorating. The report states: “With rising debt levels, interest cover for most of the groups has declined further.
Aggregate interest cover for these top ten groups has dropped from 1.6x to 1.4x. Yet, it is also discomforting to note that much of the interest has been capitalised as projects are under construction. Once projects are commissioned, the interest expense will hit the balance sheets very hard.”
For instance, the report notes that Reliance Power could face some issues in servicing debts. The report says, “Reliance Power has a P&L interest of Rs580 crore, whereas its capitalised interest is Rs1,470 crore, which would bring down the interest cover from 2.4x to 0.7x at the current profit levels.”
Much of the banks’ non-performing assets (NPAs) have not yet accounted for large corporate loans, which remain low. However, if the infrastructure companies do not deliver, the damage inflicted on financial institutions’ balance sheets could be bad. The report says, “Indian bank NPAs have already moved up from 2.5% to 4% of loans, most of these has been on account of rising delinquencies in agriculture, small- and medium enterprises (SMEs) and mid-corporates. Large corporate NPLs are still low. A study of these ten groups reveals, the over-leverage in the large corporate segment is high and is a potential source of additional asset quality stress for banks.”
However, the key to servicing debt is whether the projects of infrastructure companies will be commissioned (to boost cash flow, to service debt) this fiscal or not, before they go belly up and spill damage to the financial sector. The report says, “With over 13,000 MW of power capacity from these groups scheduled to be commissioned the current year will be critical.”
Moneylife had already written an in-depth cover story on public sector bank and the same can be accessed here