NPA mess: Rising stressed assets in telecom, power worrying: Credit Suisse

Illustration: Ajay Mohanty
At a time when the jury is still out on the recent decisions by the Maharashtra and the Uttar Pradesh (UP) governments on farm loan waiver (agri loans) that are likely to put an additional burden on the exchequer, there are bigger problems at hand.

A recent report by Credit Suisse titled ‘India Corporate Health Tracker’, co-authored by Ashish Gupta and Kush Shah, pegs the total stressed assets with banks in the fourth quarter of financial year 2016-17 (Q4FY17) at Rs 14.5 trillion, or Rs 14.5 lakh crore, which is marginally less than the Rs 14.8-lakh crore figure from the December 2016 (Q3FY17) quarter. 

However, what’s worrying is that the share of the telecom sector in these stressed assets has now increased to 12 per cent (from 10 per cent in Q3FY17), while that of the utilities sector (largely power) has surged to 17 per cent (versus 14 per cent in Q3FY17). The agri sector, on the other hand, has remained constant at three pre cent.

That apart, the share of debt with companies with an interest coverage ratio of less than one stood at 40 per cent in the quarter ended March 2017, marginally less than the 41 per cent recorded in the December 2016 quarter (39 per cent excluding Tata Motors, as it exited the list after a one-time appearance in the third quarter), the Credit Suisse report says. Their sample of 3,700 companies had an aggregate debt of $540 billion.

By definition, the interest coverage (IC) ratio is a measure of a company's ability to manage its outstanding debt. Generally, a ratio of at least two is the minimum acceptable norm. On the other hand, a coverage ratio below one indicates that a company cannot meet its current interest payment obligations and, therefore, may not be in good financial health.

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The performance of the telecom sector continues to worsen, Credit Suisse says, with aggregate interest cover falling to 0.3x vs 1.5x a year ago. The share of debt with companies having interest coverage ratio of less than one has increased to 57 per cent ($23 billion). However, the share of infra and construction and metals sectors in the overall debt has declined by one percentage point in each sector at 21 per cent and 15 per cent, respectively, in Q4FY17.

Among individual companies, Tata Motors and Jindal Stainless are the only large companies to exit the list in the fourth quarter of FY17; while DLF, NHPC, CESC, Tata Communications, and Gitanjali Gems are some of the companies that were added to the list during this period, Credit Suisse says.

While most banks have recognised 40-70 per cent of their steel sector loans as non-performing assets (NPAs), the research house feels that specific provisioning for these NPAs still remains low at around 30 per cent. 

"We estimate on average a 70 per cent haircut is needed to get to an interest coverage of one for steel companies with interest coverage of less than one but generating operating profits," it says.

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Earlier, Credit Suisse had pegged the total stressed loans for the banking sector at around Rs 12 trillion, or Rs 12 lakh crore. This, according to a revised estimate, has now increased to Rs 14 lakh crore.

"Recognised impaired loans are already at Rs 12 lakh crore, even after the banks have written off Rs 2.3 lakh crore in the last few years, and a part of the stress is still to be recognised. The actual stress has turned out to be larger than our initial estimates, and we estimate that given Rs 1 lakh crore of power sector stress is still unrecognised, and there are unresolved stress in some of the large conglomerates, the total stressed loans are Rs 14 lakh crore,” the report says.

NPA woes by the numbers

Sector % share in stressed assets
  Q4FY17 Q3FY17
Infra & Construction 20 22
Utilities 17 14
Metals 16 17
IT / Telecom 12 10
Industrials 7 12
Diversified 5 5
CRE 5 3
Services 4 4
Textiles 4 5
Consumer 3 3
Agri 3 3
Pharma 2 1
Airlines 1 1
Energy 1 0
TOTAL STRESSED DEBT (Rs) 14.5 lakh crore 14.8 lakh crore
Source: Credit Suisse report    

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