An employee of Muthoot Finance Ltd., one of India’s leading providers of gold-based loans, counts Indian one hundred rupee banknotes in a branch in New New Delhi.(Photographer: Anindito Mukherjee/Bloomberg)

Rs 2.6 Lakh Crore Of Loans Could Slip In The Next 12-18 Months 

India Ratings and Research expects potentially Rs 2.6 lakh crore of corporate and small and medium-sized enterprises (SME) loans (3.2 percent of total bank credit) could be recognised as stressed loans by the financial year 2018-19.

As per India Ratings analysis, Indian banks are sitting on unrecognised stressed loans worth of Rs 7.7 lakh crore.

India Ratings study pegs stressed corporate and SME debt at 22 percent 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 percent 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 percent by FY18/FY19. Credit costs however will show an extended recovery period, 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 (PSBs) and private sector banks at around 20 basis points 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 percent is to stressed public sector units, around 2 percent of it either enjoys some group support and could flow to joint lender forum or would be subject to asset sale, around 2.9 percent could be the addition to the restructured book from infrastructure projects and 3.2 percent is the potential slippage in next 12-18 months.

The sector wise break up of stress shows some interesting findings; the sectors which 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 (RBI) 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.

India Ratings and Research, a wholly owned subsidiary of Fitch Group, is a SEBI and RBI accredited credit rating agency operating in the Indian credit market.