Corporates Will Continue to Default on Bank Loans - Vivek Kaul's Diary
Free Reports

Corporates Will Continue to Default on Bank Loans

Apr 17, 2018

28

We have extensively written about how corporate loan defaults have screwed up the state of banks in general in India, with public sector banks in particular.

This can be made out from the fact that the aggregate domestic corporate lending non-performing assets (or bad loans) of scheduled commercial banks, as of December 31, 2017, stood at Rs 6,63,877 crore. Bad loans are loans on which repayment has not been made for 90 days or more.

The total domestic bad loans of scheduled commercial banks on December 31, 2017, stood at Rs 8,31,141 crore. This means that the corporate bad loans account for 80% of the overall bad loans of banks.

Having said that, it doesn't make much sense to paint all the corporates with the same brush. Borrowing is an essential part of corporate growth and that cannot suddenly go out of the equation.

Care Ratings has carried out a very interesting study on corporate borrowing and how the different kinds of borrowers (as per the total amount of borrowing) are placed in their ability to repay bank loans, at this point of time.

Care Ratings took a sample of 2,314 companies, which excludes banks and other finance companies. The total borrowing of these companies stands at Rs 20.02 lakh crore as of March 31, 2017.

--- Advertisement ---
This Invitation of a Lifetime Expires in Few Hours

We can see that you still haven't taken us up on the invitation to become a member of Equitymaster Insider...

So, we thought we would send you a reminder that you have till midnight, tonight to redeem this invitation.

We can't tell you how much we don't want you to miss out on the opportunity.

Which is why you shouldn't waste any time...

Click here to redeem your invitation...
------------------------------

The interest coverage ratio of these companies stood at 3.92. Interest coverage ratio is basically obtained by dividing operating profit of a company (or companies) by interest payments that need to be made on outstanding loans, during a particular period. This ratio fell to an almost similar 3.9 for the period April to December 2017.

This tells us that on the whole, the corporates are making enough money to keep servicing the interest that is due on their debt. But averages as usual hide the real story, which starts to change, as soon as we start to dig a little more.

Let's look at this in detail one by one:

  1. For the period April to December 2017, 578 companies in the sample with an outstanding debt of Rs 4.78 lakh crore, which amounted to 24% of the total debt, had an interest coverage ratio (ICR) of less than 1. This basically means that companies which have taken on one fourth of the corporate debt (as per the sample used) are not earning enough money to keep servicing the interest payments on their debt.

    When the interest coverage ratio is less than one, the operating profit made by the company is less than the interest payment that is due. In such a situation, neither the company, nor the bank is left with many options. If the company's situation does not improve, it is more than likely to default on the bank loan.

    How has the situation changed when we compare the financial year 2016-2017 with the period April to December 2017? In 2016-2017, 524 companies with total debt amounting to Rs 5.42 lakh crore, had an interest coverage ratio of less than 1.

    What this means is that in April to December 2017, more companies ended up with an interest coverage ratio of less than one. Nevertheless, a smaller amount of money was at stake.
  2. Let's take a look at Table 1:

    Table 1: Distribution of companies and ICR according to debt size

    Table 1 makes for a very interesting reading. Let's start with the large companies with a debt of Rs 5,000 crore or more. There are 68 such companies. Their interest coverage ratio has come down from 3.22 to 3.08. But this fall is not huge.

    Further, there are 23 companies with a total debt of Rs 2.82 lakh crore, with an interest coverage ratio of less than one. This basically means that large companies form a bulk of the debt of Rs 4.78 lakh crore of companies, with an interest coverage ratio of less than one.

    This basically means that the banks haven't seen the last of corporate defaults and more defaults will happen in the time to come.

  3. The companies with a debt of Rs 2,500-5,000 crore are in the worst possible space. The interest coverage has fallen from 2.26 for 2016-2017 and to 1.73 during the period April to December 2017, respectively. Clearly the positon of these companies on their ability to keep paying interest on their debt has come down.

    There are 56 companies in this bracket. Of these 22 companies have an interest coverage ratio of less than one. These companies have a total debt of around Rs 75,000 crore. These companies (along with large companies with an interest coverage ratio of less than one) primarily operate in the steel, engineering and textiles sector. Take a look at Table 2.

    Table 2:
  4. Interestingly, companies with lower levels of debt seem to be better placed on the interest coverage ratio front.
  5. The study further shows that the companies with higher levels of outstanding debt have seen sharper declines in their interest coverage ratio during April to December 2017, in comparison to 2016-2017. As Madan Sabnavis and Rucha Ranadive, the authors of this report put it: "A combination of declining interest coverage ratio and interest coverage ratio less than 1 is a good signal to identify debt service failure."

To conclude, what these data points tell us for sure is that the banks haven't seen the last of corporate defaults. There is more to come.

Regards,
Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul's Diary

PS: Every day the markets are open, Ankit Shah cherry picks one idea from our 9 premium services, the one he considers the best money-making opportunity. This one idea is shared with an exclusive group of readers on Ankit's 'Insider' list. Today, you have the chance to join this exclusive group. But you must hurry. This is a limited period offer. It ends at midnight tonight! Get full details here...

Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

10 Economic and Political Lessons from BJP's 5:0 Washout December 12, 2018
The voter has voted. And some sheen is clearly come off brand Modi.
Dr Urjit Patel, Have You Ever Heard of Shakti Kapoor and Dance Dance? December 11, 2018
Patel sacrificed himself for the RBI to tell the world that all is not well when it comes to the institutional independence of India's central bank.
When It Comes to Housing Loans, Banks/HFCs Have a Long Way to Go December 10, 2018
India's home loan to GDP ratio is a very low 10%. Only if home prices were more reasonable, the ratio would have expanded more.
This Indicator Can Tell You Where the Indian Economy is Headed December 7, 2018
Keep a watch on these numbers if you want to get a sense of how the GDP growth will pan out.

Equitymaster requests your view! Post a comment on "Corporates Will Continue to Default on Bank Loans". Click here!

2 Responses to "Corporates Will Continue to Default on Bank Loans"

Raman

Apr 24, 2018

A more transparent and credible way of assessing the risks and monitoring them periodically is more essential. Early detection and salvaging real bad decisions are crucial. Hope the newer laws and IBC help manage future loan disbursements more effective and profitable.

Like 

Venkatesh Kumar

Apr 17, 2018

Perhaps the lower ICR is due to poor business caused by the effects demonetization.

Like 
  
Equitymaster requests your view! Post a comment on "Corporates Will Continue to Default on Bank Loans". Click here!