28 August 2018: Fears of a bad loan spike in the banking sector have returned with a likely surge in defaults in NBFCs and lower-rated companies, amid tight credit conditions. Debt of Rs 2.4 lakh crore is currently being put through the central bank’s June 7 framework to resolve stressed assets but what is worrying analysts is that at least 70 per cent of this is chronically stressed and could lead to another wave of bad loans.
Bank NPAs declined from 11.7 per cent in March 2018 to 9.6 per cent in the first quarter of the current fiscal year. But a Credit Suisse analysis sees stressed loans again exceeding 12 per cent as 2.8 per cent of bank loans are likely to see fresh wave of inter-creditor agreements (ICA) being signed. “ICAs reflect (a) second wave of stress. It is the only restructuring framework available to banks. Debt of Rs 2.4 lakh crore across 16 stressed corporates is being put through this, partly as IBC (Insolvency and Bankruptcy Code) outcomes have also slowed,” said Ashish Gupta, a research analyst at Credit Suisse. “Of the current ICAs, 50 per cent is related to financials, while 70 per cent of non-NBFC debt under ICA is chronically stressed which was earlier under CDR, SDR and S4A (various debtresolution frameworks).”
According to a report by Credit Suisse, the share of debt with companies having an interest coverage ratio of less than 1 was 42 per cent at the end of the June quarter. Interest coverage ratio is a measure of a company’s ability to make interest payments through its earnings. The Indian economy grew at its slowest pace in five years in the last quarter of fiscal 2019, reflecting the stress faced by businesses. Consumption is hit with non-bank lenders’ loan growth slipping into the negative territory — credit outstanding shrank nearly 2 per cent in the quarter ended June 30.
Credit profiles of companies also worsened to a 19-month low in July, according to a CARE Ratings index that tracks 1,601local firms.
“(The) debt quality index fell sharply in June 2019, mainly due to moderation in the liquidity scenario for NBFCs and HFCs (housing finance companies) resulting in sharp rating migration, and declined further in July,” the ratings firm said in a report.
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