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Banks May Need To Tackle Another Rs 1.6 Lakh Crore In Stressed Loans, Says Jefferies

Bad loans in the Indian banking system stood at Rs 9.4 lakh crore as of the end of March 2019.

A dump truck unloads soil near the abandoned Matrishri Usha Jayaswal Thermal Power Plant in Bana village in the district of Latehar, Jharkhand, India.(Photographer: Prashanth Vishwanathan/Bloomberg)
A dump truck unloads soil near the abandoned Matrishri Usha Jayaswal Thermal Power Plant in Bana village in the district of Latehar, Jharkhand, India.(Photographer: Prashanth Vishwanathan/Bloomberg)

Indian lenders may need to deal with another Rs 1.6 lakh crore in stressed debt held by 40 companies and groups, according to a deep dive into corporate credit quality by Jefferies Equity Research. This amount, while significant, is not large enough to suggest a ‘second wave’ of non-performing assets, the brokerage house said in a report on Thursday.

Bad loans in the Indian banking system stood at Rs 9.4 lakh crore as of the end of March 2019, shows data from the Reserve Bank of India. As such, another burst of bad loans should be seen as the long tail of the current stressed asset cycle rather than a second wave, Jefferies said.

While recent corproate debt defaults are not sector-specific, “the common thread still revolves around leverage, including leverage at the promoter entity level,” Jefferies said.

As part of its analysis, the brokerage house studied Rs 33 lakh crore in listed corporate debt and found that the Rs 1.6 lakh crore in stressed debt is concentrated in 40 entities. Of these, Jefferies has classified seven as ‘high risk’, 13 are classified as ‘medium risk’and 5 are classified as ‘low risk.’

Assessing Bank Exposure

In assessing bank exposure to these companies, Jefferies found that companies classified as high risk posed the highest risk to Yes Bank followed by Bank of Baroda.

In Yes Bank’s case, the seven ‘high risk’ corporates accounted for 38 percent of reported net worth. For Bank of Baroda, these corporates accounted for 15 percent of the reported net worth. IndusInd Bank and RBL Bank also had relatively higher exposures of 9.3 percent and 7.8 percent respectively.

The seven companies and groups categorised as ‘high risk’ include the financial services businesses of the Anil Ambani Group, Cox & Kings Ltd, CG Power Ltd, DHFL, Essar Shipping, Mcloed Russel Ltd. and Sintex Ltd.

When all categories of high, medium and low risk corporates were seen together, Yes Bank’s exposure to these set of companies stood at 6.4 percent of FY19 loans. For IndusInd Bank, this proportion stood at 4.4 percent. For RBL Bank, it was at 4.3 percent.

Weakness In A-Rated Debt

In the past year, several corporates, including non-bank financial companies and housing finance companies, defaulted on their debt or saw their credit ratings downgraded by rating agencies.

“As a result, lenders to these entities, especially banks, had to bake in higher provisions or mark-to-market haircuts on their bond portfolios,” Jefferies said.

Of the Rs 33 lakh crore of outstanding corporate debt, excluding financial companies, 38 percent have a credit rating of ‘AAA, 11 percent are rated at ‘A’ and the remaining 14 percent have a credit rating of ‘BBB’ or below.

“Incidentally, the 'A' rated corporates are those where we believe there is meaningful divergence based on the current interest coverage and debt serviceability ratio, and are prone to further rating downgrades,” the report said.

It added that ‘A’ rated companies have the highest possibility of a downgrade due to the elevated debt-to-EBITDA ratio.

In terms of sector-specific risks, Jefferies says that a significant portion of asset quality challenges are likely to emerge from telecom, construction or real-estate.

These sectors have “a high incidence of companies where the credit ratings are 'A' or lower and in aggregate the interest-coverage-rate levels too are quite low,” it said.