With the rupee in virtually freefall, though it clawed back 223 paise against the dollar on Thursday thanks to the special RBI window for oil PSUs, both corporate India and the banks that have lent money to it have reason to panic. A study by Credit Suisse (CS) of India?s most leveraged corporates has some worrying numbers (see Deadly Debt on page 4 of today?s newspaper). These 10 groups have seen their share of total banking loans double to 13% over the past 5 years and, given the trouble they are in, pose a rising risk to the banking sector. Indeed, while NPAs of banks have risen quite sharply over the past year, large corporate loans turning NPAs are still a small share of the total?this is what is now a potential threat. Indeed, given the average FY13 loan growth to them?24% each to the Lanco Group, Reliance ADA Group and GVK Group, for instance?it is surprising RBI still hasn?t got around to relooking, and lowering, the high group exposure norms for banks. As a result of their high debt and falling profits, not only do these groups have a low interest cover, even this is falling?for the 10 groups, the ebit-to-interest ratio fell from 1.6 in FY12 to 1.4 in FY13, the number being as low as 0.6 in the case of the Lanco Group, 0.4 in the case of the GVK Group and 0.7 in the case of the GMR Group. Which means, given the way earnings are, these groups cannot even pay their interest rates from their current earnings. Which is why, as FE?s story on page 1 points out, a consortium headed by SBI is likely to give another R6,000 crore to the highly-leveraged Essar Steel?a move which will help the company not default on its payments.
All the groups, it is true, are trying to hawk off assets to fix their debt profile a bit, but with the banks not really leaning hard, partly because the legal system is so cumbersome, they are finding no takers since the valuations they are asking for are still not bargain-basement ones?in the case of the Delhi-Gurgaon Expressway, not part of the CS study, the deal to sell the project to the biggest lender, IDFC, came a cropper with the franchisee still in court over it. What makes the situation more precarious is that all the groups have large ongoing projects and any delay in them could make their interest coverage ratio fall even more?given the delays in infrastructure projects, in getting coal linkages for instance, that is a real possibility. And, once the projects come on stream, and their interest rates stop getting capitalised, the interest cover will also fall further, from 2.4x to 0.7x in the case of Reliance Power at current profit levels, according to CS. The other problem is that with about half the total debt in forex, the increased liabilities as a result of the depreciation since April 1 are around 10% higher than FY13 PAT for these groups. Hardly surprising, then, that CS calls the report the House of Debt.
