Corporate leverage in decline, banking strain remains: DBS

Leveraged firms continue to hive off their non-core businesses or are in midst of a debt restructuring exercise with banks

India Inc is witnessing gradual unwinding of corporate leverage, but the "strain" on the banking sector is likely to remain for the time being, says a DBS report.

According to the global financial services major, gradual unwinding in corporate leverage is under way and the overall corporate sector stability improved in 2015-16 as against 2007-08, but the stress on banks' balancesheets stays.

"Encouragingly, gradual unwinding of corporate leverage is under way, but trends suggest the strain on the banking sector is yet to run its course," DBS said in a research note.

According to the report, though the overall corporate sector stability has improved over the years, the profile of stressed industries suggests that deleveraging process is not on account of a turnaround in demand, improved liquidity or lower credit costs.

"Hence, instead of an improved business environment translating into better corporate earnings, leveraged firms continue to hive off their non-core businesses or are in midst of a debt restructuring exercise with its banks," the report noted.

For the quarter ended March this year, banks' gross non-performing assets jumped to 7.6% of total advances, from 5.1% in the September quarter of 2015.

Meanwhile, in its recent Financial Stability Report, the Reserve Bank of India noted continued stress on banks' balancesheet, but expects improved macro stability to provide some relief, going forward.

The proportion of firms in the central bank's sample with negative net worth (debt equity ratio of equal or more than 2.0) declined from 19% in January-March 2015 to 14% in the March quarter of 2016.

Similarly, 'highly leveraged' firms (debt equity ratio of equal to more than 3.0) eased to 12.9% in the March quarter this year, from 14.2% in the first quarter of 2015. The share of such firms in total debt was at 19% by the March quarter of 2016, down from 23%.

Meanwhile, rating agencies have voiced concern over public sector banks' capital needs and inadequacy of funding options.

Moody's expects asset quality to be under pressure over the next year.