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A key threat to a nation’s financial stability is the level of corporate leverage. That fear is coming home to roost for many Indian banks. The combined debt to equity ratio of BSE 500 firms was 1.28 times at the end of financial year 2014 up from 0.9 times five years earlier. With an economic slowdown biting into earnings, the debt servicing capability of firms has also come down as other yardsticks such as the interest coverage ratio show.

For Indian banks, another trouble is the rising levels of loan concentration. The top 15 groups in the country together account for 16.6% of bank credit, up from 13% five years ago. To be sure, these firms have access to other sources of credit such as external commercial borrowings, but with almost all banks having major exposures to the same group companies, India’s concentration risk is among the highest for Asian countries. While many groups show strong fundamentals and have sizeable cash warchests, for many others, especially in sectors such as infrastructure and mining, key financial parameters are at critical levels.

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