At least Rs 10.52 trillion worth of corporate loans — around 16 per cent of the system-level corporate debt — is likely to default over the next three years due to prolonged slowdown in the economy. Empirically, about 25 per cent of the vulnerable debt is likely to turn delinquent – resulting in additional Rs 2.54 trillion of delinquent debt, according to a report by India Ratings & Research.
There is an existing Rs 7.35 trillion of corporate debt in the system and with the additional Rs 2.54 trillion of delinquent debt, the overall debt that becomes vulnerable to default is Rs 9.89 trillion, the report says.
A loan becomes delinquent when a borrower makes payments late (even by one day) or misses a regular instalment payment(s).
India Ratings has taken into account top 500 debt-heavy private-sector issuers for the study after assessing their asset quality. The report buckets issuers in five categories of vulnerability — low, moderate, high, extreme and stressed.
The report details the base, bull and bear case estimates for system-wide credit costs based on the historical default rates and loss, given default for each vulnerability bucket. Credit costs on the corporate book are likely to amount to 2.15 per cent of the system debt in the base case.
"Of the companies which are already stressed (that is, recognised as defaulters by banks and credit rating agencies), lenders to at least half of these companies are likely to be required to take deep haircuts, given the inherently weak asset quality of these issuers," said Arindam Som, analyst at the ratings company.
However, in case the growth in real gross domestic product (GDP) sees a sharp recovery (around 7 per cent over FY21-FY22), delinquencies could be lower by 87 basis points (bps) to 3.13 per cent of the system debt. But, if the slowdown accelerates, to say 4.5 per cent over FY21-FY22, delinquencies could be higher by an additional 159 bps to 5.59 per cent of the system debt, the report added.
India's gross domestic product (GDP) growth slipped to nearly a 7-year-low of 4.7 per cent in the December quarter, owing to contraction in investment and manufacturing output. Looking ahead, GDP growth is set to stagnate at 4.7 per cent in the March quarter (Q4), too, according to the annual estimate by the National Statistical Office (NSO), which has forecast 5 per cent growth for full financial year.
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