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Large companies continue to be under stress, despite the promise of 'Achche Din.' HDFC Bank's move to sell down a corporate loan of Rs 550 crore suggests that private banks are choosing to cut their losses rather than throwing good money after bad. The move has created a minor flutter in banking circles and analyst community, as the understanding is that the leading private bank probably sold the NPA as it did not have faith in the corporate or the revival in the sector. The bank plans to use their floating loan provision to provide for this non performing loan.
HDFC Bank conveyed to analysts that their exposure of Rs 550 crore was 1.5 per cent of systemic exposure, which implies that the banking sector's exposure to this account is Rs 36,000 crore. There are few borrowers with that kind of exposure and given that the sector is clearly under stress, HDFC Bank would have had to go with the consortium and its decision on the corporate's exposure. Emkay Global writes in a note, despite fresh slippages of Rs 1630 crore (2% of loans), gross NPAs declined 0.9% qoq, due to sale of a corporate NPA (Rs 550 crore) to an ARC. The bank’s gross NPAs (0.9% of loans) and net NPAs (0.2% of loans) are some of the best in the sector.
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Analysts claim that the private sector bank has chosen to sell the NPA because it probably did not wish to participate in the recast process of the consortium. After the sale, analysts claim, the bank has Rs 200 crore in security receipts and the rest has been provided. Analysts believe this is a smart move on the part of the bank as any loan recast at this point would mean taking a call on the sector's potential, which is not what a lender is supposed to do. Says one analyst: "These are calls best taken by equity investors. Debt investors cannot keep putting good money after bad."
Analysts have already started red-flagging an acceleration in steel sector NPAs. Credit Suisse this week came out with a detailed note on this. Ashish Gupta of Credit Suisse writes in a note that high commodity exposure of banks (particularly metal sector) is likely to add to the asset quality woes. Bank loans to the sector have increased at 21 per cent CAGR over the last five years and now account for 4-9 per cent of the loan books of banks. The more worrisome part is that the 54 per cent of the exposure is to corporates where debt/ebitda is in excess of six times in FY14.
Quoting newspaper reports, Gupta says "banks are still planning additional lending and '25 year refinancing' for these stressed loans years, weakening profitability (falling global, domestic steel prices and rising imports) is risk to these refinancing."
If the NPA that HDFC Bank has actually sold down as stressed asset is from the steel sector, as speculated by the market, then it is not a bad thing. Both the public sector banks should take some lessons from HDFC Bank and cut their losses rather than take further bets on a sector that may fundamentally take much longer to revive. The steel sector NPAs have been steadily rising, as viability of these players have come under pressure thanks to the global situation. The revival of this sector does not necessarily depend on demand pick-up in India but how China behaves in world markets.
China accounts for 50 per cent world steel capacity and has aggressively started exporting its surplus steel produce over the last one year, as domestic demand has slowed. Taking a call on steel prices and its revival is not something banks should do, says another analyst.
