70% of banking sector debt affected by Covid-19 impact

The Indian economy wasn’t in great shape even before the Covid-19 outbreak, which has only made matters worse. The report by the Reserve Bank of India’s (RBI) expert committee on a resolution framework, headed by former ICICI Bank chief K V Kamath, brings this out clearly. The report notes that the pandemic “has affected the best of companies” and businesses that were otherwise viable before the outbreak. Experts believe that banks may be more risk-averse to restructuring loans this time around, having already suffered big losses in previous restructuring efforts.

₹15.5 lakh crore: Covid-19’s exclusive addition to stressed debt

Nineteen sectors, which were not under stress before the pandemic but have been hit it, account for ₹15.5 lakh crore of debt. Retail and wholesale trade are the worst affected with outstanding debt of ₹5.4 lakh crore. The pandemic has also affected 11 sectors which were already under stress. These sectors have a debt of ₹22.2 lakh crore. Non-banking financial companies (NBFCs) have the highest , ₹7.98 lakh crore, among these sectors. Agriculture and allied products make up the biggest silver lining in India’s debt landscape. This sector has debt of ₹9.8 lakh crore. It was stress-free before the pandemic and continues to be so.

 Up to half of stressed companies do not meet restructuring criteria

The Kamath committee has specified sector-specific ratios on five major parameters – total outstanding liability to adjusted net worth, total debt to earnings before interest, tax, depreciation and amortisation (EBITDA), current ratio (current assets divided by current liabilities), debt service coverage ratio and average debt service coverage ratio to decide whether or not companies will be eligible for loan restructuring. A Nomura analysis of 5,179 companies across 25 sectors shows that 30-50% of them do not meet the necessary criteria on backward looking data.  

Huge write-offs in previous restructuring might make banks more risk-averse

The Nomura report expects risk-aversion among banks to rise given their bad experience in previous restructuring cycles. “We think banks will be a lot more prudent towards restructuring in this cycle vs past restructuring cycles where ultimate slippages/write offs were as high as 70-75% in the corporate segment”, the report said. That’s bad news for industry.