Rss

  • stumble
  • youtube
  • linkedin

INDIA -How power, metal sectors are in quagmire of indebtedness

Banking District

Banking District (Photo credit: bsterling)

 

Most loans under stress are largely in the two sectors

Shishir Asthana / Mumbai Aug 06, 2012,  BS

Moneycontrol report says Essar Steel is under stress for servicing its Rs 23,000-crore from banks. The company is 30 days behind schedule to make its interest payment. The report says that around 18-20 banks have provided the amount to the company, with one state-owned having an exposure of Rs 9,000 crore.

With over Rs 2 lakh crore of loans up for restructuring, market has been either focusing on high debts of individual companies or the entire sector, which is causing a lot of stress on banks’ financials. However, a recent report by Credit Suisse points out to the rising risk in the banking circle on account of concentration of loans to houses.

In a report titled House of Debt, points out that over the past five years while bank loan growth has been 20%, loans to 10 business groups have increased by five times. Their loan currently is equivalent to 13% of bank loans and more importantly it is 98% of banking system’s collective net worth. In terms of concentration risk, Indian banks are more risky than their Asian and BRIC counterparts. Concentration of top 10 groups to bank loans in China is 1% as compared to 13% in India.

The table shows the exposure of banks to various corporate groups. While average group debt to operating profit (EBITDA – earnings before interest tax depreciation and amortization) is 7.6 times, four of the 10 groups have an interest coverage ratio of less than one. In other words four of these groups are barely making enough profit to meet their interest payment.

Worst is that loans which are under stress are in largely the same sector (power and ) across groups and in some cases to various companies within the same group.

Recognising their high leverage and poor profitability, these groups are looking at bringing to at asset sales under pressure from their lenders. Unfortunately the assets are all from the same sectors (cement plants/infrastructure/power) which are finding fewer buyers. In each of these groups has 2,000-4,500 MW of capacities being commissioned over the next three years. These account for 70% of power plant to be commissioned by the private players and all of them face the same issues of gas/coal supplies and power purchase agreements (PPA) signed at much lower tariffs.

While market has factored in most of the issues of individual company and sectoral debt issues, inter-dependence of companies within the group, pledging of group company shares and guarantees of group companies make the issue trickier.

Related posts

Comment (1)

  1. The concentration of loans in the hands of a small group is the direct result of our Government favouring these firms for obvious reasons. The banks shouldd have a properpolicy against putting their eggs in a few baskets.

Leave a Reply

%d bloggers like this: