Stressed assets in banking sector may rise to 14% in 2015

Total number of corporate debt restructuring cases and their average ticket size climb higher in January

Despite the accumulation of stressed assets by Indian banks over the last few years, rating agencies still maintain a 'stable' rating on them. Off the record, however, bankers believe that if GDP growth does not pick up and interest rates don't start coming down, banks could very well become the cause of stress in the financial system. The primary reason behind this is the rather grim prognosis for the sector in FY15.

India Ratings has conveyed to Citi analysts that it expects gross stressed assets to rise to 14 per cent by 2015 from 10 per cent currently, which is possibly the worst case scenario. Even though the stress so far has been in the mid-corporate level, larger accounts are now coming under pressure. The problem in the mid-market segment is higher due to weak collaterals and economics. Morgan Stanley's analysts believe that delinquencies in this segment will be volatile on a quarterly basis but will remain high. The rise in impaired loan formation will remain elevated in FY15, unless GDP growth picks up.

The total number of cases referred to the corporate debt restructuring (CDR) cell and their ticket size continue to climb higher. In FY13, average quarterly references to CDR averaged at Rs 23,000 crore which have risen to Rs 36,000 crore in FY14. The month of January has seen a sharp uptick in referrals to the CDR cell with six cases adding up to Rs 11,000 crore being referred, which suggests that the average ticket size has gone up to over Rs 1,800 crore. Going by this data, Macquarie Capital expects stress in the banking system to continue. The brokerage expects a large number of cases to be referred in March which will keep the quarterly run-rate of CDR references high.

The average ticket size has nearly doubled to Rs 1,500 crore in the current fiscal compared to FY13, which implies that larger accounts are now coming under stress. That stress is not expected to abate is apparent from two other pieces of data. First, of the total outstanding CDR cases, 70 per cent have been recast in the last two years. Second, the total number of CDR cases being downgraded to non-performing loans is higher than successful exits. In December 2013, merely two cases worth Rs 1,500 crore exited while 12 cases worth Rs 4,100 crore failed and were downgraded to non-performing loans.

Most brokerages are staying away from financials, especially state-owned banks, as cost of credit will remain high and provisioning will also accelerate in FY14 and FY15.