The Reserve Bank of India expressed concern over high corporate leverage as bad loans from the country’s top corporations increased sharply between March and September, 2015.
“Corporate sector vulnerabilities and the impact of their weak balance sheets on the financial system need closer monitoring,” RBI Governor Raghuram Rajan said in the foreword of the semi-annual Financial Stability Report.
A significant increase in the gross non-performing asset ratios of large borrowers among public sector banks, from 6.1 per cent in March 2015 to 8.1 per cent in September 2015, has led to an increase in the GNPA ratio of the banking system, according to the report.
As a result, standard assets among large borrowers declined from 86.2 per cent of total gross advances as of March 2015 to 84.5 per cent as of September 2015.
Credit to top 100 large borrowers, in terms of funded amount outstanding, constituted 27.6 per cent of the credit to all large borrowers and 17.8 per cent of the credit of all commercial banks.
The share of gross NPAs of these 100 borrowers in total gross NPAs of all commercial banks increased sharply from 0.7 per cent in March 2015 to 3.1 per cent in September 2015.
Loans to the industrial sector account for a major share of their overall credit portfolio as well as stressed loans, according to the report.
“This aspect of asset quality is related to the issue of increasing leverage of Indian corporates. While capital expenditure (capex) in the private sector is a desirable proposition for a fast growing economy like India, it is observed that the capex, which had gone up sharply, has been coming down despite rising debt.”
The profitability and as a consequence, the debt-servicing capacity of companies, has seen a decline which is an indication of halted projects, rising debt levels per unit of capex, overall rise in debt burden with poor recoveries on resources employed.
“The travails of the “industrial” sector may also be exerting a demonstration effect inhibiting new investments.”
“Banks extended disproportionately high levels of credit to corporate entities / promoters who had much less ‘skin in the game’ during the boom period.”
The gross non-performing advances of commercial banks, as percentage of gross advances, increased to 5.1 per cent from 4.6 per cent between March and September 2015, the RBI data showed The restructured standard advances as percentage of gross advances declined to 6.2 per cent from 6.4 per cent while the stressed advances ratio increased to 11.3 per cent from 11.1 per cent during the same period.
