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RBI is now talking of corporate group risks which were highlighted by Credit Suisse India over a year back in its report titled ‘India Financial Sector’ dated August 2, 2012. RBI believes that the risk in banking system has increased in the past six-months and a failure of a major corporate or corporate group could trigger a contagion in the banking system.
It does not matter that Credit Suisse beat RBI in raising its concern on this issue. But what is surprising that despite having knowledge of this skewed exposure with several reports on it, neither the banks or RBI feel the need to take steps to bring down the exposure. Now we are faced with a situation where failure of the large corporate groups could result in a loss of 60 per cent of banking system’s capital.
At present a bank can take a single borrower exposure of upto 25 per cent of its total capital and upto 55 per cent of group exposure. Globally the norm is 25 per cent for group exposure. In other words default by even a single borrower can bring down a bank which in turn can have a domino effect on the entire sector.
The Credit Suisse report points out that exposure to only 10 corporate groups accounted for 13 per cent of bank loans but they were equivalent for 98 per cent of the banking sector's net worth. In plain language, this means that the exposure to these 10 groups is enough to wipe out almost the entire shareholder capital and the profits accumulated by the banks over the years.
Though this is a doomsday scenario, the fact that these corporate belong to sectors like power, steel and infrastructure makes this a not so distant possibility.
Even though the concentration of corporate group loans has been reported well over a year, they have taken nearly five years to build. Credit Suisse report says that the Indian banks registered a 20 per cent growth rate since the last five years (till August 2012) but this has been driven by a select few corporate groups.
Cumulative debt levels of the top 10 groups – Adani Enterprises, Essar, GMR, GVK, JSW, Jaypee, Lanco, Reliance ADA, Vedanta and Videocon had jumped six times in the past six years touching Rs 6.31 trillion. And it is not just the size of these loans that are a cause for worry but the leverage these corporates have ‘managed’ to get.
A Business Line report by CP Chandrasehkar and Jayati Ghosh (Read here) points out that there is only one corporate group among the 10 that has a debt equity ratio of less than one, two have ratios between 1 and 1.5, three have ratios between 2 and 4, three more have between 4 and 5 and one has the distinction of having a debt equity ratio of 9.4. Compare this to the average debt equity ratio of 0.7 of all loans and we are staring at a huge problem. Debt to equity ratio tells us the amount of loan the corporate has managed to get vis-à-vis the money it has put in.
The reason RBI seems to have ‘woken’ up to this scary scenario is due to some of these assets coming up for restructuring. Till the time these corporate groups were making timely payments, they were not classified as ‘stressed’. But now due to the prolonged slowdown, some of these corporate are in trouble.
Another important statistic pointed out by Chandrasekhar and Ghosh is that the ratio of gross non-performing assets and restructured loans to infrastructure has risen from 4.66 per cent in March 2009 to a whopping 17.43 per cent in March 2013. Most of these restructured loans have a tendency of become non-performing over time.
Now that even banks have not been able to ‘hide’ these loans and RBI has highlighted it, we are in big trouble.
