Corporate India is addicted to debt

India Inc has an addiction that it cant quite shake off “Debt”, and this addiction is getting worse every year. The FSR report released by the RBI also painted a gloomy picture of the NPA problem of the Indian banking system and rising corporate debt.
Stress in the banking sector.
The RBI recently set an ambitious target of ensuring that banks clean up their balance sheets by 2017
“I want to put something like March 2017 on the table as when we hope that a full clean-up will have been done,” Rajan told reporters following the RBI’s December monetary policy statement. But is it possible ? lets look at the numbers.
  • Total stressed assets in the Indian banking system are estimated to be anywhere between $110 billion. and $161 billion. Gross NPAs of public sector banks sood at Rs 3.14 lakh crore at the end of September 2015. Wilful defaulters owe PSU banks a total of Rs 64,334.59 crore, which adds upto about 21% of the total NPAs.
  • Out of of the total Rs 2,62,402 crore belonged to nationalized banks, Rs 38,209 to the private banks as of December 14.
  • The disparate estimates are because of the various classifications of the loans.
  •  GNPAs (gross non-performing assets ratios) of large borrowers among public sector banks rose from 6.1 per cent in March 2015 to 8.1 per cent in September 2015.
  • According to the FSR report NPAs as a percentage of total net advances have increased to 2.8 per cent in September from 2.5 per in march.
  • PSB are the major culprits with 14.1% of their total assets being stressed, followed by private banks at 4.6% and foreign banks at 3.4%.
  • NPAs of 39 listed banks rose 26.87% to Rs.3.40 trillion for the quarter ended September 2015 from Rs.2.68 trillion same period last year.
  • According to ICRA sum of gross NPAs and restructured assets—in the Indian banking system stood at 11.1% of total advances at the end of the July-September quarter.
  • The gross non-performing assets of at least 17 of the 39 listed banks is more than 5%, six of the banks have GNPAs of more than 7% and one bank (Indian overseas bank) has a GNPA in double digits.
  • NPAs have risen 20% YoY as of September 2015
  • State Bank of India (SBI) had maximum number of wilful defaulters at 1,164 who owed Rs 11,705 crore followed  by Punjab National Bank with 764 wilful defaulters who have defaulted a total of Rs 9,203.84 crore.
NPAs are a byproduct of banking operations. Former finance minister P Chidambaram stated that “bad loans are a function of the economy and hence”. But having said that why is the current crisis special ? and why does it deserve extra attention ?
The origins of this mess can be traced to the lend baby lend policies followed by the banks during the 2008-2010 period when banks went a lending rampage betting on a economic recovery.
Historically there has been a high degree of political interference in the functioning and loan disbursal’s policies of the PSBs. A majority of loans were dispensed either indiscriminately without proper due diligence or under political pressure during 2008-2012, when the hopes of economic growth were buoyant.
Although this chart doesn’t give you the latest picture it shows the trajectory and the picture hasn’t gotten better.
The major reason why PSB are saddled with a majority of stressed assets (over 70%) are due to an unholy confluence of factors such as impotent management, weak credit appraisal practices, herd mentality by the smaller banks following the larger ones in the form of consortium lending, lack of monitoring and early detection systems and policies and more.
Although the global economy has slowed drastically and the economic recovery in India is anemic at best, the above factors have played a significant role in the current crisis that the Indian banking system particularly the PSBs are facing. The govt also shares blame in this, the policy paralysis during the latter years of the UPA ensured that banks started digging their graves a little faster than usual.
By the time the RBI under the leadership of Dr.Rajan took cognizance of the stressed assets problem, damage of epic proportions had already been been caused.
You might be wondering why PSB are saddled with a lions share of the NPAs ? In addition to the above stated practices and the compulsory mandate they have of lending to the “Priority Sector” this short competitive analogy published in the Business Standard should give you a insight into how inept PSBs are as compared to their private peers.
Lack of talent in the boardrooms and the inability to attract talent from the private sector due to political interference have also been cited as reasons by multiple experts. Shortened tenures and borrowing executives from other PSBs are also reasons.
In contrast the tenures of KV Kamath at ICICI bank and Adity Puri at HDFC have benn the polar opposite. Although ICICI too is facing asset quality issues it is better off than the PSBs on any given day, HDFC has had a phenomenal journey under Aditya Puri and has become synonymous with innovation and its digital transformation.
The troubles for the banking sector, especially the PSBs doesn’t end there. According to a Fitch Ratings report, Indian banks need $140 billion capital to ensure full compliance with the Basel-III norms by 2018-19. The Basel-III norms are aimed at bolstering banks’ resilience by ensuring a capital adequacy buffer.
Crooks and corporates
Eventhough the stressed asset problem is huge, it is not across the system as widely assumed. The majority of stressed loans are confined to the Industrial sector, Infrastructure (especially power), iron & steel and textile industries, engineering and cement have are the leading contributors of stressed assets.Telecom, aviation and real estate are the other honorary members of the NPA club.
According the central banks stress tests among the select seven sectors, engineering had the highest GNPA ratio at 8.5 per cent as of September 2015, could see their GNPA ratio moving up to 14.5 per cent by March 2017 followed by iron & steel (from 8.4 per cent to 11.5 per cent) and cement (from 6.4 per cent to 11.2 per cent)- FSR
Debt to Ebitda
Another distressing fact is that the loans of the 10 most indebted companies make up 12% of the total loans in the system and 27% of corporate loans according to credit suisse. This shows that the distressed issue allthough present across all major sectors is highly concentrated in these few companies.
As of September quarter, Videocon group, GMR Infrastructure Ltd, GVK Infrastructure and Power, Essar group, Adani group and the Jaypee group had an interest coverage ratio below 1.5. When a company’s interest coverage ratio is 1.5 or below it means that the company is in trouble and its ability to service its debt is questionable.
The interest coverage of these groups dropped from 0.9 in 2013-14 to 0.8 in 2014-15. The debt/EBITDA rose from 6.8 to 7 for the same period.- A high deb to ebitda multiple suggest that a company may not be able to honor its debt obligations.
Of the nine groups in the image only Sajjan Jindal’s JSW group, Anil Ambani’s Reliance Group, and Vedanta reported an interest coverage ratio of more than 1.5. That should give you an insight into the scale of trouble these big conglomerates who have diverse business interest, most often in stressed sectors are in.
According to the credit suisse report Adani Group (debt up 14% year-on-year) and Videocon Group (debt up 11%) saw the highest increase int heir debt levels. The situation might worsen fr the Adani group as it has lined up several acquisitions.
An analysis of 3,000 listed firms by Goldman Sachs noted that half the debt is held by 1% of the firms and concentrated in the industrials, utilities and materials sectors. The top 10% of companies hold about 90% of total debt, it said. Also firms constituting of 74% of market cap have their leverage ratios below their historical averages- net debt/ebitda of less than 2X.
The analysis had concluded that this was not a system wide problem and corporates without leverage had the space to grow. But the picture might not be as rosy as painted by Golman Sachs
According the recent FSR report which we summarized.
The number of “highly leveraged” companies rose to 15.3 per cent as of September 2015 from 13.6 per cent a year ago, said the RBI report.
“The proportion of companies among the leveraged companies with debt equity ratio (DER) greater than or equal to (>=) 3, termed as ‘highly leveraged’, increased from 13.6 per cent in September 2014 to 15.3 per cent in September 2015,” – FSR
The share of debt of these companies in the total debt increased from 22.9 per cent to 24.9 per
“The proportion of companies with negative net worth or DER >=2, termed as ‘leveraged’, shot up over the last three-and-a-half years from 18.4 per cent in September 2014 to 19.4 per cent in September 2015. Their share in the total debt of all companies in the sample marginally declined to 30.5 per cent in September 2015 from 33.8 per cent in March 2015.”
The FSR report by the RBI analysed the performance of the corporate sector using select non-government non-financial listed companies for the period FY11 to FY16. The report stated that after deterioration in the first quarter of FY16, crucial parameters such as operating profit, EBITDA, net profit and interest coverage ratio showed improvement in the second quarter.
While the big daddies of Indian corporate world were making headline over their debt woes the smaller unlisted companies were not far off. between 2012-14 these companies saw a sharp rise in their leverage with their ability to service their debt declining. Unlike the big companies these companies cannot dial a loan from their banks, nor do they have avenues to raise capital.
To show you an example of how utterly inept the PSBs are , int he last six months gross bad loans of large borrowers have increased and all of these were from public banks which can only lead to one conclusion that is these banks have been masking the real extent of the rot.
Gross bad loans of large borrowers jumped from 6.1% in March 2015 to 8.1%. The share of the big borrowers in the overall gross bad debt of the banking sector also jumped from under 1% in March to 3.1% in September. Also the restructure loans of the large borrowers made up for 8.6% of the overall segment.
Due to sheer size of this issue we cannot possibly fit all the facts and numbers into a decent sized article and still hope that you are awake at the end. So we will bring all the data to you in parts. The series will be title “The next big crisis”

Lazyrupee is a blog dedicated to informing investors about important events that impact their portfolio. An important objective is also to promote market participation the right way by providing important insights to invest safely and profitably.

Next Post »


Write comments
January 22, 2016 at 11:53 PM delete

This is an Excellent Article on Banks Sir !! Awesome Abhi !! The Govt of India Rants the banks to Lend more reduce their interest rates still. I wonder how it can be possible for banks ..with the data we have seen above .. Looks like Dead lock. The power sector under piyush goyal is beacon in this dark space