The Reserve Bank has estimated in the Financial Stability Report that bad loans with banks will rise from 4.6 percent currently to 4.8 percent by September this year and then may recede to 4.7 percent by this fiscal-end.
But experts believe neither is the loan default problem so small nor is it receding so quickly. In fact, analysts and bankers say an extraordinary solution like a stressed asset fund or a bad bank is needed to resolve a bulk of the bad loans issue.
The RBI has said that growth in bad loans will start slowing by the end of this year, but a growing number of experts don't agree with the central bank. A Credit Suisse report has studied the debt of 3700 companies amounting Rs 32 lakh crore. The report says 37 percent of these companies have interest expenses which are more than their EBITDA, ie: earnings before paying taxes and interest. Also, 3.5 lakh crore of debt is of companies where the interest outgo is more than EBIDTA for the past 12 quarters and these are still standard.
Ashish Gupta, analyst, Credit Suisse, says: "Naive to look at stress only in terms of NPA; this number will be rising for the next two years"
Examples of companies like Usha Martin and Bhushan Steel put things into perspective - the debt per tonne of installed capacity is USD 1000-1400, while it is USD 400 for players like Tata Steel. And these companies are operating at 30-50 percent because of cheaper imported steel.
How do these companies and banks get out of such a debt trap?
Diwakar Gupta, Former MD & CFO, SBI: "There is a need to set up an empowered committee, and the decisions of the committee should be abiding."
Also, the government's current math of capital infusion - of USD 3-6 billion a year will not be enough.
Credit Suisse's Gupta says: "State-owned banks need USD 40 billion or Rs 2.5 lakh crore of capital over the next 5 years."
Finally experts say, whether it's a committee of bankers forcibly selling stressed companies or a stressed asset fund, the solution needs to come quickly.
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