Corporate default risk dogs banks

First, it was concern over defaults from retail and small and medium enterprises (SMEs). Now, the effects of a global slowdown on India have made banks to factor in rising prospects of defaults from companies.

Not to be caught off-guard, banks have started assessing the extent of the impact on specific sectors and clients and, in some cases, they have even begun discussions on remedial steps such as seeking a Plan-B on operations and repayment.

The effect of the slowdown — global as well as in certain pockets of the Indian industry – will translate into reduced earnings. In addition, the high cost of funds will escalate debt payment obligations for companies. “There is an increased concern over profitability. Quite a few companies may see a decline in cash flows and this could increase prospects of a default,” said a senior State Bank of India executive.

In the last five to seven years, the profile of bank lending has changed and more funds have been sanctioned for capital expenditure. “This raises the issues of asset-liability mismatch since resources are raised for short tenure, while lending happens for a long duration. Plus, when there is a cash-flow problem in long-term projects, it impacts banks immediately,” said a senior executive heading risk management at a large public sector bank.

Rating agency Crisil expects an intensified downward pressure on the credit quality. The real estate sector faces an immediate vulnerability to funding pressures affecting credit-worthiness. The demand slowdown in sectors like textiles, information technology and automobiles has begun; sectors like telecommunication and power would be less vulnerable to the demand slowdown.

Keeping such assessment in mind, banks have begun a dialogue with vulnerable companies to understand cash-flow conditions and spot the problems early.

An Andhra Bank executive said, “We are doing this exercise for getting a hang of the situation and improve our preparation to deal with future developments. However, banks do not want to create a sense of panic by giving an impression that the economy is in for a major slump.”

“There is a perception that growth will be less than the estimate for companies in the wake of the slowdown. This may impact profitability,” Bank of India Executive Director B A Prabhakar said.

At present, there is no clear trend visible about the spurt in risks from companies. But banks are cautious and will not like to be taken by surprise, he added.

Half of the developed world, accounting for over 50 per cent of the gross domestic product (GDP), is either under a firm grip of the slowdown or even recession. Indian companies with export-focused operations and significant exposure to Europe and America will face an adverse impact. “That may cause disruption in earnings and may make units to seek re-schedulement in loan payments to banks or, in extreme cases, there could be defaults,” a bank executive said.