The Indian economy wasn’t in great shape even before the Covid-19 outbreak, which has only made affairs worse. The outline 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 outline paper money that the pandemic “has affected the most productive of companies” and businesses that were another way viable before the outbreak. Experts consider that banks is also more risk-averse to restructuring loans this time around, having already suffered big losses in preceding restructuring efforts.
₹15.5 lakh crore: Covid-19’s exclusive addition to stressed debt
Nineteen sectors, that have been not under stress before the pandemic but have been hit it, account for Rs 15.5 lakh crore of debt. Retail and wholesale business are the worst affected with outstanding debt of Rs 5.4 lakh crore. The pandemic has also affected 11 sectors that have been already under stress. These sectors have a debt of Rs 22.2 lakh crore. Non-banking financial companies (NBFCs) have the highest , Rs 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 Rs 9.8 lakh crore. It was once stress-free before the pandemic and continues to be so.
Chart: Banking sector debt under stress
Up to half of stressed companies do not meet restructuring criteria
The Kamath committee has specified sector-specific ratios on five major parameters – complete outstanding liability to adjusted net worth, complete 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 come to a decision if 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 essential criteria on backward taking a look data.
Chart: Percentage of companies not inside prescribed bands
Enormous write-offs in preceding restructuring might make banks more risk-averse
The Nomura outline expects risk-aversion among banks to rise provided their naughty experience in preceding restructuring cycles. “We think banks will be much more prudent towards restructuring in this cycle vs past restructuring cycles where final slippages/write offs were as high as 70-75% in the corporate segment”, the outline said. That’s naughty news for industry.
Chart: Write-offs/Downgrades over 2012-13 to 2019-20 as percentage of cumulative restructured books up to 2017-18