Crisil warns money squeeze to worsen asset quality of banks

The credit rating agency in its recent report has warned that Reserve Bank of India’s recent liquidity tightening measures to curb exchange volatility would worsen non-performing asset of banks as the sectors like power, construction, engineering and steel will find it difficult to repay loans.

“Definitely banks are going to see an impact in terms of their non performing assets and our estimate is about 3.3 percent NPAs as of March 2013. We could see that climbing about 70 basis points to about 4 percent by March 2014,” Ramraj Pai, President, Crisil Rating told CNBC-TV18.

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It must be noted that the banks have started receiving request for loan restructuring from big account especially in sector power and construction. According to some new reports, Lanco Infratech has started a process to restructure debts totaling Rs 7500 crore after economic weakness impacted the performance of some of its businesses such as power and engineering and construction.

Pai expects the pressure in sectors like power and construction to continue.

Below is the verbatim transcript of the interview

Q: Could you walk us through the key findings of your earning and what they spell for corporate India in FY14?

A: I think we had done an analysis based on the recent moves from the Reserve Bank of India on tightening liquidity. Essentially this is an analysis which we had done in about 12,000 firms.

What we see clearly is that it is going to have an impact so obviously while we have been facing difficult times otherwise also the incremental squeeze on liquidity is going to have an impact. Our estimate is that the total amounts of repayments which are coming up for the year are in the region of about 1.1 trillion. Given the present situation that we are seeing, we see that profits will be able to repay only about 67 to about 70 percent of this 1.1 trillion coming up for repayment which would mean that about 30 percent of these funds will need to get refinanced.

Traditionally, refinance has been something that corporate have always used. It is just that in the context of slowing corporate profitability, in the context of the fact that liquidity is tight we believe that this refinancing could become some bit of an issue.

One, both in terms of availability of funds as well as in terms of the cost at which these funds are going to be available both in India as well as internationally.

Overall, what we feel is that this is definitely going to have an impact on the credit quality of corporate India. Definitely banks are going to see an impact in terms of their non performing assets and our estimate is about 3.3 percent NPAs as of March 2013. We could see that climbing about 70 basis points to about 4 percent by March 2014.

As you mentioned, some of the sectors, power, capital good, steel some of these sectors definitely we are going to see some degree of an impact in terms of the overall numbers.

Q: Was your number less than 4 percent couple of months back. I remember hearing that FY14 will have higher non performing loans than FY13 for some time now. Has your estimate of amount of NPL generation increased?

A: I remember that we were on this show few months back in April at that time also we were anticipating that numbers would go up. I recall the number was about 3.5-3.6 percent. We are now looking at a number closer to 4 percent.

Q: Would the restructured loans also go up very sharply? I am asking you because of your stress sectors you begin with power and that rings a bell – one of the bigger power boys, Lanco Infratech on Friday apparently had started its moves towards the corporate debt restructuring (CDR) – do you think that we are going to have many more restructured assets especially in the power space?

A: The unfortunate part of the power sector is that, the sector has had whole host of issues right from the issues of coal and assets being financed by foreign currency loans which may not have been hedged. I think this is an additional issue. We are in a scenario where there is a lot of apprehension amongst bankers even in sectors, which I may say are relatively better off.

Whereas on the power side, I don’t think the negativity is very high. Definitely, we will see more stress in the power sector, though I must say that a lot of this could come up on the generation side.

We had done a story little while back, maybe year, year and a half back where we had spoken about the whole discoms and the fact that the discoms are going through a lot of stress. We are expecting a pressure in the generation side and there could be substantial amount of capacity which could be at threat.

Q: You have also spoken about the rating downgrade will out number the number of upgrades. How long will this last? How many more quarters?

A: Yes. This number the ratio of upgrade to downgrade was 1.14 two years back. Last year the number was 0.6 and indeed we had brought out a report in April where we were believing that this number could start improving. We were anticipating an interest rate cycle tapering downwards. A little bit of improvement on the demand situation.

The way the things have panned out in terms of the interest rate scenario, the currency is having an impact on a lot of sectors. We aren’t seeing really any revival whatsoever on the economic side and in fact; precisely because of these reasons we are expecting that this ratio could get worse. Definitely, I would say through 13-14 is what our expectation would be. If I say that is slightly at odds with or a change of stance vis-à-vis what we had said in about five months back. Then we were hoping and our numbers were showing some initial positive trend. But I think a lot of these factors that we have been seeing over the last 3-4 weeks give us that sense that there is still a lot of pain that we are going to see definitely through this year.