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'Companies may default on Rs 2.54-L cr bank loans in next 3 years’

The predictions are based on the assumptions of 6% average real GDP growth in FY21 & FY22.

, ET Bureau|
Last Updated: Mar 02, 2020, 08.12 AM IST
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KOLKATA: An additional 4% of outstanding corporate borrowings from banks, translating roughly into Rs 2.54 lakh crore could tip into default over the next three years if the pace of economic expansion doesn’t pick up sufficiently.

A study of top 500 private sector companies by India Ratings & Research showed that about Rs 10.5 lakh crore of their debt could turn vulnerable, which means borrowers could face difficulty in servicing these loans.

These 500 debt-heavy borrowers have an outstanding loan book of Rs 39.28 lakh crore. Out of this, the existing default amounts to Rs 7.35 lakh crore loans.

The size of system level corporate loan book stands at around Rs 64 lakh crore.

The rating firm has done the study for its clients.

“The problem emanates from the inability of corporates to deploy their funds productively. The share of productive assets in the system has gone down sharply as incremental debt continues to be used to fund losses and even large sums of related-party transactions. This makes it imperative to strengthen corporate governance standards,” said Arindam Som, an analyst at India Rating & Research.

The predictions are based on the assumptions of 6% average real GDP growth in FY21 and FY22, with input cost not rising more than 4% and rupee not depreciating by more than 5%. Even if the average GDP growth rises to 7% over the same period, the incremental slippages could still be around Rs 1.98 lakh crore over the next three years, the analyst said.

The Indian economy grew at 4.7% during the third quarter of FY20. India Ratings has predicted 5.5% GDP growth for FY21.

In case the average real GDP growth slows to 4.5% over FY21-FY22, incremental delinquencies could be higher by an additional 159 basis points to 5.59% of the system debt, the study said.

Som said the sectors that are most vulnerable now are iron & steel, residential real estate, engineering, procurement & construction (EPC), conventional power generation and telecom.

The fresh default of Rs 2.54 lakh crore is likely to result in around Rs 1.37 lakh crore in credit costs, putting banks’ profitability under more pressure. According to Reserve Bank of India’s new rule, companies that delay in loan repayment by a single day are considered defaulters. A default does not necessarily mean that it would translate into non-performing assets. An account is classified as NPA if it is not serviced for 90 days.

The report identified the quantum of vulnerable debt by analysing the refinancing risk and asset quality for 11 sectors and places each sector in its vulnerability matrix. The report further discussed the components of refinancing risk – business risk, liquidity and financial flexibility of the players in each sector.

The firm had conducted a similar analysis in 2016 & said that the predictive ability of the analysis was very high, with around 67% of the extremely vulnerable issuers actually defaulting since then.
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