While the Indian banking system has recorded a scorching pace of loan growth in the past five years, its exposure is concentrated on a select group of ten corporate houses competing in the same sectors which poses risk, a study by Credit Suisse has revealed.
The exposure to the 10 corporate groups that have presence in key sectors such as power, steel, infrastructure development, etc, that drive economic growth amounted to 13 per cent of the bank loans and 98 per cent of the banking system’s net worth.
In terms of concentration risk, the Indian banks ranked higher than most of their Asian and BRIC peers, the equity research report titled ‘India Financial Sector’ dated Aug. 2 said.
Amongst a few only
The report pointed out that in the last five years, the Indian banks registered a 20 per cent compounded annual loan growth. But this has ‘increasingly been driven by select few corporate groups’ and in the last financial year, more than 20 per cent of the incremental loans were from a mere 10 groups.
Credit Suisse said the cumulative debt level of the top 10 — Adani Enterprises, Essar, GMR, GVK, JSW, Jaypee, Lanco, Reliance ADA, Vedanta and Videocon — had jumped five times in the past five years (40 per cent CAGR). This equates now to 13 per cent of the entire bank loans and 98 per cent of the ‘net worth of the banking system’.
Each group now accounted for 1–2 per cent of total bank loans and “in terms of the concentration risk to the top groups or to the top borrowers, Indian banks rank high compared with most of their Asian and BRIC counterparts,” the report said.
Because of economic slowdown and the headwinds power and metals sectors face, the report said, the “multiple assets of each group appear stressed and financials of these groups are stretched.” There were some positive developments, though, with wholesale rates moderating, liquidity easing and current account deficit narrowing. The domestic bond yields have also eased to 8.3 per cent from 8.7 per cent levels due to RBI action.
However, it did not expect the interest rates to drop sharply as the bank loan-deposit ratios at over 77 per cent ‘continue to be stretched’.
A try at Divestment
Credit Suisse report mentioned that due to factors such as ‘high leverage levels, poor profitability and pressure from the lenders’, most of these groups carrying heavy debt have resorted to divestment of some of their assets. But it did not expect the demand for their assets to be high as the domestic infra players were ‘already over-geared’.
The report said that the ‘problem asset accretion’ for the banks was high. Much of the problem loan accretion was from sectors such as agriculture, SME and mid-corporate segments. It believed that large corporate stress was yet to be reflected in the problem — asset rise reported by them. But when project loan restructuring took place, it would push up further the problem loans.
The report said an analysis of the BSE-500 companies showed that receivables had been rising 30-32 per cent y-o-y in the past two years compared with 10-20 per cent in the previous two years. Companies with the highest debt increase also saw a 54 per cent y-o-y increase in receivable levels.
Credit Suisse said though wholesale rates show signs of coming down, it was ‘cautious on the corporate asset quality outlook’ for the banking sector and was ‘underweight’ on the sector. Its ‘top picks’ in the financial space were HDFC and HDFC Bank and it continued to be’ cautious on the corporate banks — SBI, ICICI, PNB, BOI, Union and YES (Bank)’.