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When moving forward means taking past along

For Indian corporate entities and banks, leaving the past behind is not an option this year

Intense scrutiny from the regulator means that banks no longer have the ability and the willingness to be patient with errant borrowers. Photo: Ramesh Pathania/MintPremium
Intense scrutiny from the regulator means that banks no longer have the ability and the willingness to be patient with errant borrowers. Photo: Ramesh Pathania/Mint

It’s that time of the year again. Social media timelines are filled with messages about new beginnings. A new year brings with it a fresh start. A fresh start means leaving the past behind. For Indian corporate entities and banks, though, leaving the past behind is not an option this year. Many of them will carry the past with them into 2016 and hope that they can slowly shed the baggage along the way.

For the country’s banks, the year starts on a sombre note. Bad loans were supposed to have peaked by now. Growth was to have made a comeback. But it hasn’t played out that way. As 2016 dawns, there is still no clarity on whether the worst of the bad loan problem is behind us.

The data, so far, is not providing much comfort. According to the Reserve Bank of India’s (RBI’s) latest financial stability report, the gross non-performing assets (GNPAs) of scheduled commercial banks have crossed 5% of the loan book. As of September 2015, GNPAs were at 5.1%, compared with 4.6% at the end of the March quarter. All stressed assets, which include restructured assets, rose to 11.3% from 11.1% over the same period. For public sector banks, the ratio is noticeably higher at 14.1%. Sixteen banks, which had a 27% share of overall advances, had a stressed asset ratio of more than 16%. The banking regulator has now given banks a sort of deadline to clean up their books by March 2017.

In a recent interview with Mint, RBI deputy governor S.S. Mundra said the central bank doesn’t have a certain level of stressed assets in mind but it would like to see banks recognize problem assets and provide for them appropriately.

This process of cleansing may mean more pain in the near term. Intense scrutiny from the regulator means that banks no longer have the ability and the willingness to be patient with errant borrowers. The once cosy relationship between banks and large companies appears to have broken down. Evidence of this comes through in the data. The GNPA ratio of large borrowers among state-owned banks jumped sharply from 6.1% in March 2015 to 8.1% in September 2015. It shows that banks are finally taking the tough decisions on large loan accounts.

As banks move towards cleaning up their books, more such pain points may emerge. Banks will also be racing against time to sell the assets where they have converted debt into equity. Since banks have 18 months to sell these assets (and most were converted in the September-December quarter), asset sales would need to start materializing at some point next year.

In the midst of this bad-loan clean-up, banks will also be trying to retain market share as credit growth picks up. It is quite possible that private sector banks, including the two newly christened banks, will walk away with market share if state-owned banks are capital-starved and pre-occupied with cleaning up the excesses of the past.

A similar theme may play out for the corporate sector where companies who binged on debt in previous years will be forced to hunker down and clean up their act before they try and capture any new emerging investment opportunities.

The RBI report quoted above also threw light on the depth of the corporate debt problem. About one-fifth of listed non-government, non-financial companies are categorized as leveraged. These are companies which have a negative net worth or a debt-equity ratio of more than two times.

About 15% of these forms fall in the highly leveraged category. In the unlisted universe, data for which is only available till the end of fiscal 2014, about a quarter of the firms (both public limited and private limited) fell into a category defined as “weak". These are firms that have an interest coverage ratio of 1.

The quality of debt among rated firms has also been on the decline. Rating agency Crisil Ltd, in its outlook for 2016, noted that the debt-weighted credit ratio, which measures upgrades versus downgrades in terms of the quantum of debt, fell to a three-year low.

Cutting down this debt through either asset sales or improving earnings will be a slow grinding process which will continue through 2016 and probably beyond that.

Some analysts feel corporate debt will not impact a lift-off in the private investment cycle, but that’s far from clear. Most firms don’t seem to be in the mood to make large investment decisions and any change in that sentiment may only manifest itself closer to the end of the year.

If 2016 is starting to sound like a drag before it even begins, worry not. There will be enough that will be new and exciting. Twenty-one new banking entities for starters. Some of the 11 payments banks and 10 small finance banks (SFBs) should start to roll out in 2016. The payment bank led by Vijay Shekhar Sharma, founder of e-commerce firm Paytm, may be among the first to launch and could give us a taste of what is to come. The rate on small deposits they choose to offer will be all important and could be potentially disruptive for banks. In the case of SFBs, there is a lot of restructuring that will need to be completed before the launch so that the existing microfinance firms can transition into SFBs. In the process, some of these entities will become publicly listed, allowing investors to get a piece of this evolving banking model.

Speaking of the primary markets, after the successful listing of 21 firms, which raised close to 14,000 crore in 2015, the primary markets are set to remain active in 2016.

About 30 companies have filed initial public offering (IPO) papers. Most of them should launch their issues next year unless the market environment turns adverse. This should give investors the opportunity to buy into new and interesting businesses in high-growth sectors.

So, while it may not be “out with the old; in with the new", 2016 will likely herald a mix of the new and the old.

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Published: 31 Dec 2015, 09:46 PM IST
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