Mumbai: ICICI Bank’s takeover of a stake in a debt-laden telecom tower firm is an ominous sign of things to come as India’s slowing economy and slumping shares erode the value of collateral on loans that companies are struggling to repay.
Weak markets, the global debt crisis and surging interest rates will further cripple Indian companies’ ability to raise funds and manage borrowings and could worsen banks’ credit quality.
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State-run lenders, which account for 70% of the country’s total advances, have voiced concerns over loan-repayment capabilities of borrowers after a rise in bad debts.
Compounding the problem, founders of several companies have pledged their shares for loans, meaning that as stocks fall, banks are demanding a top-up in security.
More than $33 billion worth of shares have been pledged with banks as collateral, with founders of as many as 17 companies pledging over 90% of their holdings, Bank of America-Merrill Lynch said in a June report.
“This is over-leveraging. It’s like a fire. It will hit both the corporates and the banks,” said Jagannadham Thunuguntla, equity head at brokerage SMC Capitals.
“There are some companies where the founders have pledged almost 100% of their shareholding. It could backfire.”
Crisil, majority owned by Standard & Poor’s, expects more credit downgrades and defaults for Indian companies in the coming months, director Ramraj Pai told Reuters.
Bad loans at Indian banks are expected to rise to about 2.6% of their total assets in the year to March 2012 from 2.3% a year ago, ratings agency Crisil said. They have remained at the 2.3-2.4% levels since 2008.
A total of 43 accounts have defaulted in the June quarter, more than a third in the year to March 2011, Crisil said.
Investors have dumped bank shares on concerns of credit quality, slowing growth and lower profitability in a rising interest rate environment.
Shares of Indian lenders including No.1 State Bank of India, ICICI, Bank of India and Union Bank of India have fallen 18-22% so far this year, compared with a 13% fall in the BSE Bank index .
‘That Sinking Feeling’
About 17% of Indian banks’ outstanding credit could be stressed, IDFC Securities said in a recent research note titled ‘Asset Quality - That sinking feeling.’
“Stubborn inflation, a spurt in interest rates and slower economy are straining India Inc’s debt-servicing capacity. Ongoing infrastructure projects are at risk due to policy paralysis and a plethora of scams,” it said.
Infrastructure assets including telecom, construction and power, which account for about 25% of total corporate credit, are a key concern for banks.
“Real estate will be more vulnerable to slippages, and infrastructure as well,” said Alok Mishra, chairman and managing director of state-run Bank of India.
Banks are also keeping a close eye on India’s No. 2 mobile carrier Reliance Communication , which is struggling to reduce a $7 billion mountain of debt, after posting a seventh straight quarterly profit decline in January-March.
Reliance has said that “strategic initiatives” were underway to reduce its debt. It had said in May it was looking to sell its tower arm to raise funds to lower borrowings but is yet to announce a deal.
The telecom sector is under pressure due to the ongoing investigations over irregularities in the 2G spectrum allocation that state auditors say cost the government $39 billion in lost revenues, higher interest rates and low average revenue per user.
“Some companies in the infrastructure sector specifically have extended themselves beyond their capabilities. If these projects don’t go through or there is a change in fundamentals, they can be in trouble,” said J Venkatesan, fund manager at Sundaram BNP Paribas Asset Management.
“Project finance loans are a problem too, specially when projects don’t happen as scheduled.”
He expects impact of these loans to show in banks’ books in two years as most infrastructure projects have a long gestation period. Sundaram BNP Paribas owns stakes in India’s top lenders.
Into A Rough Patch
ICICI Bank, India’s No.2 lender, assumed a 29% stake in GTL Ltd in July, taking over shares pledged by its founder. The bank recovered nearly Rs200 crore ($44.2 million) of the Rs500 crore it loaned to GTL.
GTL shares had fallen more than 60% in just one day in June on market talk it may have fallen behind the debt-repayment schedule or a stakeholder could have sold shares in the open market.
Lenders to another group firm, GTL Infrastructure , plan to meet on 12 August to consider terms and conditions for its debt-recast proposal, three bankers involved in the restructuring told Reuters.
They declined to be identified as they were not allowed to talk about their clients.
Earlier this year, liquor baron Vijay Mallya’s Kingfisher Airline ceded a more than 29% stake to a group of 14 banks including top lender State Bank of India as part of a debt restructuring.
Cases referred for corporate debt restructuring (CDR) are also rising, banks said.
In July, nine new cases worth Rs17,000 crore were referred to CDR, a bulk of it for GTL Infrastructure’s nearly $2.5 billion of debt involving more than 20 banks, the bankers said.
“As interest rates rise and there is a slowdown there will be some companies that might want to go for debt restructuring,” said B Ravindranath, chairman of the Corporate Debt Restructuring cell, which assesses and approves CDR proposals by banks.
The cell, a voluntary forum of Indian banks, said it is currently working to recast 131 loans worth nearly Rs70,000 crore for sugar mills, textile units and micro lenders, among others.
Companies that turned to lenders to get their loans restructured in the past months include Oudh Sugar Mills , which was hit by soaring input costs in a highly regulated Indian sugar industry, and microfinance firms such as Asmitha Microfin and Future Financial Services.
Analysts have cautioned against investing in the banking sector. Their top-picks are ICICI, HDFC Bank and Axis Bank , but they have a unanimous “avoid” rating on several state-run banks.
The Reserve Bank of India, one of the most aggressive globally, has raised interest rates 11 times since March 2010 by a total 3.25 percentage points to tame inflation, but at the cost of growth, pushing corporate loan rates up to more than 10.25%.
The country’s January-March growth was a worse-than-expected 7.8%, with economists expecting India to grow at 7.9% in the fiscal year that began in April, according to a Reuters poll, less than the 8.5% in the fiscal year ended in March.
“Signs of slowdown are undeniable. We are heading into a rough patch,” SMC’s Thunuguntla said.
“Banks’ asset quality should come under pressure, there is no doubt about that.”