Crisil expects NPAs to balloon from 3.3% to 4%

Ramraj Pai, President, Crisil Ratings, says repayments coming up for the present year stands at about Rs 1.1 trillion. He feels about 70 percent of it will be financed through internal accruals, but the rest will have to be refinanced either locally or internationally.

Pai told CNBC-TV18, there will be an issue with this refinancing or the cost at which thos refinancing is going to be available.

Also Read: Balanced funds better option in volatile markets: Crisil

From an overall non-performing assets (NPA) level of about 3.3 percent as of March 2013, this number may climb to about 4 percent by March 2014, he says. The balance sheets of banks are definitely much weaker.

According to him, this time for a change, the fundamental weakness in the companies is real, not because of cyclical issues but some of them could be structural.

Pai says sectors such as infra, power, capital goods, engineering, textile and steel are under stress.

Below is the verbatim transcript of Ramraj Pai’s interview on CNBC-TV18

Q: What is your sense of how intense it could get and from your universe how many companies do you think will need to restructure their loans because of an inability to service them this year?

A: We are seeing a lot of stress on the balance sheets of many companies in corporate India. I think our analysis of about 11,500 companies that we rate, reflects that the repayments coming up for the present year at about Rs 1.1 trillion, our expectation is about 70 percent of that is going to be financed through internal accruals, but there is a large component of about 30 percent, which will need to get financing through some kind of a refinance either locally or internationally and given the fact that there is a material liquidity squeeze. That is the piece that we expect to come under pressure.

Our analysis shows that either there will be an issue with refinancing or the cost at which this refinance is going to be available either in India or internationally is going to be pretty significant. As of now we have not done the analysis in terms of number of companies, but it is in terms of size of the issue. The point we are making is quite material about a third of what is coming up for repayment.

Q: Where would that entail for banks because the market has taken a very dim view of asset quality worsening this year for private and public sector banks?

A: I think we share similar sentiments. Our expectation is that from an overall non-performing asset (NPA) level of about 3.3 percent as of March 2013, we expect this number to climb to about 4 percent by March 2014. Our original expectation in January or so was that the pace of growth of NPAs would taper off in 2013-14, but we are seeing that the asset quality pressure on banks is going to continue through 2013-14 and this number doesn’t include assets which are coming up for restructuring and things like that.

Q: What is the way out? Do you think policymakers can do something like taking out some of the bad loans and try and facilitate some kind of recovery process at another end by creating institutions for loan recovery etc or do you think this is a painful cycle which companies and banks will have to go through?

A: I would go with what you were saying on the latter. It is a painful process. Lots of people have asked me the question that is this similar to 2008 and somewhere hidden in that question is the feeling that just like there was a sharp recovery from the troughs of 2008, somewhere something will happen and we will recover.

Our fear is that at this time it is going to be a long and more difficult process and for a variety of reasons even the best case forecast of growth may not go 5.5 percent maybe 6 percent is what you would look at. Banks’ balance sheets are definitely much weaker. I think for a change, the fundamental weakness in the companies is real, not because of cyclical issues but some of them could be structural.

So, unless some of those issues are going to get addressed, I do not see anything very dramatic once one stop solution, which is going to change a lot of it. So, it is going to be a painful process and we do not see anything very easy on the horizon which can solve all the problems quickly.

Q: Which sectors are most vulnerable to the kind of balance sheet pressures that you are alluding to?

A: We look at the ratio called ‘credit ratio’ which is the ratio of upgrades to downgrades so the higher the ratio the better is a sector and vise versa. So, the sectors where we see the biggest stress are infrastructure; it is something that everyone talks about but power sector is a sector where we do see a lot of stress, capital goods, engineering, textile, steel, real estate are some of the sectors where we are seeing build-up of stress, which is far higher than the average credit ratio that we see for the industry or the economy as a whole. These are some of the sectors where we are seeing a definite accentuation of the whole stress position.

So, unless some of those issues are going to get addressed, I do not see anything very dramatic once one stop solution, which is going to change a lot of it. So, it is going to be a painful process and we do not see anything very easy on the horizon which can solve all the problems quickly.