IS THIS CRISIS TIME FOR INDIA ?

As stock prices sink, major projects get stalled and RBI manadated interest rates hike in an environment of a falling Rupee, all GOI efforts to protect the Rupee and increase exports will fail. Moreover, rising oil price and falling rupee will keep raising CAD in a environment where double digit plus inflation will become the new normal. So the moot question is will all these PSU banks below Rs 100 fail first and get merged with bigger banks or will the corporates themselves fail leading to a collapse of the Government at the centre and an ultimate sovereign default?

Banks most exposed to highly leveraged companies We identified 66 highly leveraged listed companies with Net Debt/Equity ratio >1.5x and Net Debt > Rs10bn. These companies had a combined net debt of Rs 4,969bn (US$81bn) or nearly 9% of banking system loans and 15% of banking system loans to Industry & Services sector as on end FY13. Many of these companies may have problems in servicing their debt and are therefore vulnerable to being classified as NPL or restructured category. However, only a few have so far been classified as NPL or restructured.

In order to estimate bank-wise exposure to these leveraged companies, we used a simple methodology. We found the bankers to each of these companies and apportioned the company’s debt between these bankers relative to the size of their total assets.

For example, if a company has only two bankers, SBI and ICICI, the exposure would be divided between these two banks in the ratio of 3:1, since SBI’s total assets were 3x larger than ICICI as on end FY13. Taking another example, if a company has four bankers – PNB,Canara, Axis, and Indian Bank – the exposure would be divided in the ratio of 34:30:24:12, in proportion to the relative size of their assets.

It is evident that government banks, SBI, IDBI, BoB, and PNB have the maximum exposure to these highly leveraged companies,amounting to 10%-12% of their loan book. Among private banks, ICICI and Axis Bank have the highest exposure to these companies,followed by Yes Bank and IndusInd Bank. We estimate that a very small part of this exposure, between 13%-15%, has been classified as NPL or restructured until date. Consequently, there are still plenty of loans that will continue to become delinquent and banks are expected to show a rising trend in NPLs and restructured loans.