Road to loan recovery tough for banks

Many firms' debt far exceeds their market cap

This article has been corrected. Please read the clarification at the end.

Bankers have a reason to worry. Nearly two-thirds of all corporate borrowings are by companies whose stock prices are languishing at multi-year lows.

Finance Minister P Chidambaram recently asked public sector banks to get tough on wilful defaulters, saying: “We cannot have an affluent promoter and a sick company.” However, banks would find it tough to recover their dues even if they resorted to selling the shares pledged with them.

Worse still, the gap between outstanding liabilities of these companies and their market value of assets has been growing over the past few quarters. So, banks could recover only a fraction of their dues, even if they went for wholesale selling of pledged promoter shares.

A BS Research Bureau analysis of 2,800 listed companies shows 1,200 firms account for nearly two-thirds of the total loans given to the corporate sector. The current market capitalisation of all of these companies is far less than their liabilities.

The ten most indebted groups (in terms of the gap between market value and borrowings) account for 21.6 per cent of the total borrowings by all listed non-financial private-sector firms. However, the market capitalisation of these ten put together is only five per cent of the combined market cap of all private-sector firms (see table). The BS analysis excludes Indian subsidiaries of MNCs.

In the private sector, the combined market cap of 174 business groups is lower than their consolidated debt. These include the names such Adani Group, Jaypee Group, GMR, GVK, ADAG and Videocon.

Interestingly, the market cap of Vijay Mallya-owned UB Group is higher than its liability, mainly due to a sharp rally seen over the past 12 months in the share price of the group’s flagship United Spirits. At its current stock price, UB Group’s total market capitalisation stands at nearly twice its consolidated borrowings of around Rs 23,000 crore (at the end of 2011-12). This could offer banks a chance to recover their dues.

The phenomenon of debt being higher than market cap is not unique to the private sector. Among the public-sector companies, loans of large ones like Indian Oil Corporation, BPCL, HPCL, MTNL, Power Grid Corporation, MMTC and Shipping Corporation of India are higher than their respective market caps. However, these companies are less likely to default on their loans.

The total borrowings of the 1,200 companies analysed, at Rs 16.2 lakh crore as of the end of March 2012, account for 67.2 per cent of the total corporate borrowings in India. There are worries that if the economy does not recover soon, a number of these loans might either turn into non-performing assets or go for restructuring. Obviously, the market sees this looming threat over the banking sector. No wonder, banking stocks have been getting a drubbing for some time.

CORRECTION
The debt figures for Indiabulls and the Adani group, mentioned in the table of this report were not correct. This happened because the Capitaline database, from where the figures were sourced, classifies Indiabulls as a brokerage house. These have been corrected. The errors are regretted.