Risk of companies defaulting on bank loan worth ₹2.54 lakh crores

The economic slowdown may now hit the loan borrowers, according to India Ratings & Research recent study. A study of 500 private sector companies revealed that a debt of ₹10.5 lakh crores can turn vulnerable. It means that the borrowers may find it difficult to pay back this loan.

These 500 companies have an outstanding loan of ₹39.28 lakh crore and the existing default amount is worth ₹7.35 lakh crores.

If the slowdown remains consistent then 4% of outstanding corporate borrowers of ₹2.54 lakh crore could be put down in the default list in the next three years.

The client study done by the firm India Ratings & Research showed that the total loan figures booked on corporates is about ₹64 lakh crores.

The GDP growth in FY21 and FY22 shows that the assumptions of 6% input cost are below 4% and rupee not depreciating by more than 5%. And this will not improve even if the GDP growth rises to 7% where it will fall around ₹1.98 lakh crore over the next three years.

According to the study, if the average real GDP growth will not improve than 4.5% over FY21-FY22, incremental delinquencies could be higher by an additional 159 basis points to 5.59% of the system debt.

If the ₹ 2.54 lakh crore becomes non-payable then this will put banks’ profit in danger as around ₹1.37 lakh crore in credit coats will come under risk.

An analyst at India Rating & Research, Arindam Som, was quoted by Economic Times as saying, “The problem emanates from the inability of corporates to deploy their funds productively. The share of productive assets in the system has gone down sharply as incremental debt continues to be used to fund losses and even large sums of related-party transactions. This makes it imperative to strengthen corporate governance standards,”

Som added, “The sectors that are most vulnerable now are iron & steel, residential real estate, engineering, procurement & construction (EPC), conventional power generation and telecom.”

According to the Reserve Bank of India’s new rule, companies that delay in paying loan amounts will be considered as defaulters and termed as non-performing assets. An account is classified as NPA if it is not serviced for 90 days.

A similar study was conducted in 2016 and it said that around 67% of the extremely vulnerable issuers have not paid back loans and these defaulters have not been able to pay back loans since then.