A whopping Rs 53,000-crore exposure of Indian banks to seven state electricity boards (SEBs) has a "very high probability" of turning into non-performing assets (NPAs) in the quarter ending September, the Reserve Bank of India (RBI) said in its Financial Stability Report, released.
These loans were restructured in 2012, with a three-year moratorium for the principal amount of Rs 43,000 crore. If distribution companies fail to pay interest and/or the principal by June 30 (90 days from the date the moratorium ended), these will turn into NPAs.
"Considering the inadequate fiscal space, it is quite likely the government might not be in a position to repay the overdue principal/instalments in time," the report said.
That the SEBs are not in a position to repay is evident from the fact that some of them, such as the Rajasthan State Electricity Board (which posted a loss of about Rs 10,000 crore in 2013-14), requested their debt be restructured again. RBI, however, had made it clear any loan restructured after April 1 this year would attract provisioning in line with NPAs, discouraging lenders from debt recast.
The report has some positives, too. It said some risk to the banking sector had "moderated marginally", as profits rebounded in an improving economy. The gross bad loan ratio for the banking system rose 0.5 percentage points to 4.6 per cent as of March 31, compared to a year earlier, the report showed. The ratio might increase to 4.8 per cent of total loans by September, before easing to 4.7 per cent by March 2016 in a "baseline scenario", according to the report.
The rest of the report, however, goes into details about the worsening ability of debt-burdened firms to repay loans, straining a banking sector already burdened by NPAs. The sector's gross NPAs, as percentage of gross advances, rose to 4.6 per cent at the end of March this year, compared with 4.5 per cent six months ago. Stressed advances, or gross NPAs and restructured advances, rose 40 basis points to 11.1 per cent during the six-month period. Industry continues to record the highest stressed advances ratio (17.9 per cent), followed by services (7.5 per cent).
"Five sub-sectors, namely mining, iron & steel, textiles, infrastructure, and aviation, which together contributed 24.8 per cent of the total advances of banks, had a much larger share of 51.1 per cent in the total stressed advances," the report said. Infrastructure and iron & steel contributed 40 per cent to the overall stressed advances.
According to RBI, currently, five of the top 10 private steel-producing companies are under severe stress due to delayed projects resulting from various factors, including land and environmental clearances.
The iron & steel sector's gross NPAs have grown from 4.8 per cent in March 2013 to 7.1 per cent in March 2015, according to finance ministry data.
The high levels of corporate leverage were hampering banks' ability to pass on lower interest rates and boost loans, as these entities were already heavily exposed to troubled firms, the report said, adding India Inc's solvency ratios and ability to service debt, measured by its interest coverage ratios, had worsened. The report said banks should proactively manage their capital, not just adhere to the minimum regulatory requirements. It cautioned in a stressed scenario, capital constraints and margin pressure would further impair banks' ability to pass on any monetary policy signal.
The central bank forecast if macroeconomic conditions worsened, the bad loan ratio could rise to 5.9 per cent and banks would have to "bolster" provisioning to meet losses.
Source- Business standard