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The latest data shows that loan accounts of even big companies, considered to be relatively less affected by the pandemic, are on the precipice of turning sour and might add to the already large pile of bad loans.
The latest data shows that loan accounts of even big companies, considered to be relatively less affected by the pandemic, are on the precipice of turning sour and might add to the already large pile of bad loans.

More company loans close to turning bad

  • Data released by the RBI in its Financial Stability Report showed a spike in corporate borrowers who have delayed repayments by more than 60 days since the moratorium ended on 31 August

A leading indicator of stress in the banking system is flashing red.

Data released by the Reserve Bank of India (RBI) in its Financial Stability Report (FSR) showed a spike in corporate borrowers who have delayed repayments by more than 60 days since the RBI moratorium ended on 31 August.

Wholesale loans, excluding those to state-run and financial companies, that were overdue between 61-90 days (termed special mention account 2, or SMA2, loans) rose to 7.2% of standard assets at the end of November from 1.7% at the end of September, the RBI data showed. Banks term loans overdue by up to 30 days as SMA-0 accounts. SMA-1 are those overdue by 31-60 days.

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The data throws light on the extent of stress caused by the pandemic-induced economic slump, which has crimped the ability of companies and individuals to repay debt. Indian banks’ asset quality problems have been masked by the six-month repayment moratorium followed by a Supreme Court-ordered standstill on asset classification.

“RBI’s report shows that the proportion of assets in SMA2 has increased for large corporate accounts. This is a leading indicator of a build-up of stress in the wholesale portfolio category," said Sameer Narang, chief economist at state-run Bank of Baroda.

The latest data shows that loan accounts of even big companies, considered to be relatively less affected by the pandemic, are on the precipice of turning sour and might add to the already large pile of bad loans.

Although the 3 September Supreme Court order prohibited banks from classifying certain loans as bad, lenders have to categorize them as SMA -0, SMA-1 or SMA-2, depending on the extent of delay in repayments. To be sure, these are still classified as standard since loans turn bad only after they are overdue for more than 90 days. “The asset classification standstill inhibits the true underlying economic categorization of assets, although the incipient tilt is towards worsening, as indicated by the growth in balances in the next worse categories for each cohort," said RBI.

Analysts differed in their estimates of the level of stress building up in the system, although they have been raising concerns about the true extent of accumulated bad loans.

Kotak Institutional Equities said in a report on Tuesday that RBI’s forecast places a lot of emphasis on history and there has already been significant default from the large corporate segment in the previous corporate bad loan cycle.

“It appears challenging to place a weight to these non-performing loan (NPL) ratios, especially with NPL recognition behind, on corporates and a repeat in such a short period looks unlikely, especially with negligible credit consumption in each of the respective sectors," the Kotak report pointed out.

For the 12 months to 30 September, RBI data on repayment delays by large borrowers—those with fund-based and non-fund-based exposure of 5 crore or more—showed a decline. Large borrowers comprise half of all bank loans and 73.5% of bank non-performing assets.

Although the regulator allowed banks to recast loans of borrowers affected by covid-19, there have been few takers for the scheme, banks have said.

Rating agency Icra recently cut its debt recast estimates to 2.5-4.5% of advances from 5-8% anticipated earlier in August 2020.

Some analysts advised caution on the asset quality front.

“We remain watchful on the asset quality of banks as they recognize NPLs from the moratorium/overdue loans, even as overall trends have fared better than earlier expectations, aided by a sharp improvement in collection efficiency," Motilal Oswal Financial Services said on Tuesday.

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