Moody’s flags banks’ high risk exposure
Mumbai: Large loans given to businesses with poor repayment capacity have raised Indian banks’ exposure to risks, which are now second only to China in the Asia Pacific (APAC) region, Moody’s Investors Service said.
Even as overall credit penetration in India remains low, exposure to risky corporate borrowers has increased the risks of defaults, the agency said in a report on Wednesday.
Although private sector credit as a percentage of gross domestic product for India is the third lowest in the region, a considerable portion of it is owed by businesses with weak debt servicing ability. Private sector credit includes debt owed by households and private non-financial sector.
“Specifically, systems like China, India, Indonesia and Singapore report high concentration of corporate leverage among borrowers with low debt servicing capability,” Moody’s stated in the report.
Debt servicing ability has been assessed based on the interest coverage ratio (ICR) of a firm where a number below 1 means earnings are insufficient to cover the interest payments. Of the overall corporate debt owed by firms in India, over 15% is owed by firms with ICR less than 1. “In India, we observe that the high share of debt owed by weak corporates is explained by a relatively small number of very large borrowers,” the report said.
The report based on the study of 14 markets within APAC shows that while debt accumulation has slowed across the region, overall leverage remains high. Debt accumulation in India came down in the last two years.
“So far as private sector leverage remains high and rising, it undermines borrowers’ resilience to economic shocks and constitutes structural banking system vulnerability. Banks are not only exposed to direct default risks on their exposures but also to an economy’s broader adjustments to a debt overhang, including the risk of an economic slowdown and deep asset price corrections,” the report stated.
The credit ratings firm, however, expects interest rates to remain low in the coming years and high leverage to be “gradually” absorbed by the region’s economic growth.
With respect to households, credit to households as a percentage of GDP is the second lowest for India in APAC. Housing loans comprise 54.4% of the total household debt in the country followed by personal and auto loans.
“The Reserve Bank of India lowered the risk of individual housing loans to align it with Basel standards, while easing standard asset provisioning requirements for all individual housing loans. These measures provide an incentive for banks to grow housing loans,” Moody’s said, adding property prices in India have more than doubled since 2010.
The report also warns of risks that may arise on account of housing loan growth backed by appreciation in real estate price. “A significant increase in property price is a negative development because it adds to the risk of a price pullback. Banks are vulnerable to direct losses from defaulted mortgage borrowers and from exposures to construction and real estate companies,” the report said.