Banks stare at over Rs1 trillion haircut from stressed assets
Many of the debt-laden companies are from stressed sectors such as power, infrastructure and iron and steel
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Indian banks may need to take a haircut of more than ₹ 1 trillion on their exposure to debt-laden firms, many of which are from stressed sectors such as power, infrastructure and iron and steel, according to estimates by India Ratings & Research, the India arm of Fitch Ratings Ltd.
Of this, about ₹ 93,000 crore would be on the books of public sector banks. A haircut is the reduction in the amount that will be repaid to creditors.
To arrive at this number, India Ratings looked at 30 stressed companies with aggregate bank debt of over ₹ 5,000 crore each. These companies represent about 8-9% of overall bank credit, said Ananda Bhoumik, managing director and chief analytical officer at the rating agency.
The report says these firms have seen a significant increase in debt over the last few years.
“The median debt-to-equity ratio for this set increased to 4x-6x in FY15 from under 2x in FY10, while the median market cap-to-debt ratio contracted to 5-7% from 35-50%," said the report.
While a number of these firms are in talks with their banks to restructure their debt via different means, such as the 5/25 financing scheme which was introduced by the Reserve Bank of India (RBI) earlier this year, India Ratings is of the view that banks will eventually need to take some haircut in order to ensure the debt can be serviced.
“The study reveals that banks would need an average 24% reduction in their current exposure to ensure reasonable debt servicing (1.5x interest coverage ratio (ICR)) by these corporates on a sustained basis," said analysts Abhishek Bhattacharya and Kunaey Garg in the report.
These exposures are currently treated as performing assets and hence banks have only provisioned the minimal 5% against such loans.
This means that banks may have to raise additional capital should they need to write off part of the loans.
“The shortfall may significantly increase the government’s equity injection requirement compared to the ₹ 700 billion ( ₹ 70,000 crore) announced on 31 July 2015," said the report.
According to India Ratings, deeper haircuts may be needed in the textile and sugar sectors.
“While companies in the power and other infra and iron and steel sectors would need a haircut of 20-30%, few deeply levered names in the textile and sugar sectors might require a higher amount of debt reduction (30-40%)," the agency said.
The assessment does not include the debt from state electricity boards or SEBs when considering power companies, the report said. If included, SEBs could add up to ₹ 21,000 crore worth of haircut to the overall unsustainable debt.
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