Big

Pie
Analysis of major sectors’ share in NPAs

Centre for Financial Accountability








Big Pie
Analysis of major sectors’ share in NPAs


Authors: Ankit Agrawal & Anuradha Munshi
Cover & Layout: Joe Athialy


Centre for Financial Accountability, New Delhi
August 2017

info@cenfa.org
www.cenfa.org
Introduction

Indian banking system is reeling under severe crisis due to the rampant,
mindless lending without thoroughly checking the viability of the project and
bad provisioning norms.

According to the leading financial services agency Credit Suisse’s India Corporate
Health Tracker, the total debt of Indian companies stood at Rs 14.5 lakh crore in
March 2017. The inability of companies to repay these debts has led to a massive
NPA crisis in the banking sector. The crisis is so bad that the total percent of
declared NPA to their lending is in double digits for many banks. The table below
shows the banks with highest NPA ratio.

Banks with highest NPAs as of March, 2017

Canara Bank

Oriental Bank

PNB

Bank of India

Dena Bank

Central Bank

IDBI Bank

Indian Overseas Bank (IOB)

0 20 40 60 80 100 120

Indian
Overseas IDBI Central Dena Bank of Oriental Canara
PNB
Bank Bank Bank Bank India Bank Bank
(IOB)
Total Lending % of each bank 100 100 100 100 100 100 100 100
% Share of NPA 22.39 21.25 17.81 16.27 13.22 12.53 13.73 9.63

Total Lending % of each bank % Share of NPA

The data compiled by the Ministry of Finance, and reported by the media, shows
that the State Bank of India accounts for over 27 per cent of the total amount
owed to public sector banks by companies. The Punjab National Bank's share is a
distant second with just 13 per cent.

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Big Pie: Analysis of major sectors’ share in NPAs - 1 -

Though, these debts are spread across all the sectors like Infrastructure and
construction, Services, airlines, industrials, diversified, IT/Telecom, metals,
textiles, energy, agriculture, utilities, pharma, commercial real estate etc., out of
the total NPA of 14.5 lakh crore in the fourth quarter of financial year 2016-17,
the share of just infrastructure and construction, metals, and utilities, which
largely consists of power, was 53 per cent. The pie chart below shows the debt
share of major sectors.

Sectoral breakdown of the Corporate Debt

Others Infrastructure
28% 20%

Utilities
Industrials 17%
7%
Metals Telecom
16% 12%

Infrastructure Utilities Telecom Metals Industrials Others

Source: Credit Suisse

Interest Coverage

One of the ways to value to evaluate a company’s health is its Interest Coverage
(IC), which is the ratio of its operating profit to interest expenses, to determine
how easily a company can service interest payments on outstanding debt. An IC
ratio of one or more is a sign of good financial health as it indicates that the
company will cover its cost of debt for the year.

According to Credit Suisse’s latest India Corporate Health Tracker, across key
sectors, the share of companies with interest cover less than one remains high.
The top three sectors with maximum debt interest cover less than one are:

Sector Per cent of debt with IC < 1
Power 70
Telecom 57
Steel 55

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Big Pie: Analysis of major sectors’ share in NPAs - 2 -

Credit Suisse estimates that the share of debt with companies with IC<1 has
stayed high at 40% as of December 2016. Moreover, 35% of debt is with
chronically stressed corporates.

According to the RBI, Gross NPA ratio of the banking system is at 9.6 per cent
and stressed advances ratio is at 12 per cent as of March 2017. In addition to
these, Credit Susie estimates that 4-8% of the loans are parked in various stress
classifications like restructured/SDR but standard. They warn that as most of
these forbearances expire over the next 12-18 months, the corporate NPA may
rise.

Recognition of NPA in Power Sector

Power Sector Share(%) Watchlist(%)

17
0
26
23
17 0
0 3
8 6
4 3
ICICI Axis PNB Union Bank Bank of SBI
Baroda

Source: Credit Suisse

Sector wise Data

Steel:
While some of the larger companies (Tata Steel and JSW Steel) reported a profit
in December 2016, the stressed steel companies continue to report losses, with
companies like SAIL, Bhushan Steel, Monnet Ispat and Electrosteel continued to
report large losses. The aggregate net loss for the steel sector for 3Q17 was over
Rs 2600 crores.

Power:
As of December 2016, over Rs 1.267 lakh crores of debt is with the stressed
power projects. Stress within the power sector continues to rise, as most of the
larger companies saw net income decline by 13% from the previous year and
18% from the previous quarter and net profit falling by 7% and 34%
respectively.

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Big Pie: Analysis of major sectors’ share in NPAs - 3 -

Within the overall corporate debt of Rs 1.267 lakh crores in this sector, the coal-
based power plants constitute 79.64 per cent of the entire debt. The remaining
debt is created by the gas-based power projects.

As profitability remains muted, the share of debt with IC<1 increased to 67% in
December 2016 versus 63% in September 2016, with Rs 3.8 lakh crores of debt
now with the companies having IC<1. Most of the larger companies have seen
interest cover decline this quarter, with IC<1 for companies such as Reliance
Infra, JP Power, Rattan India, Adani Power (despite compensatory tariff's) Tata
Power and JSW Energy.

Share of power sector debt with IC<1

Despite the mounting and low profitability in the power sector, as of March
2017, the total impaired loans, i.e., the loans which are fully recoverable,
in the sector was at 17 per cent, the unrecognized stressed loans were at 14 per
cent, and standard loans at 70 per cent. This only points to the low recognition of
NPAs in the power sector.

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Big Pie: Analysis of major sectors’ share in NPAs - 4 -

 % share of total Restructured Loans (Rs. 2000 billion)

Power Steel Textile Other Infrastructure Others

21%

49%
10%

3%

17%

Crisis at the Doorstep

It is estimated that Indian banks need a minimum of Rs. 86,000 crores of
provisions on existing NPAs over the next 12 months as regulatory provisions
are based on old non-performing loans. Besides many private banks had
previously under-reported the loans to keep the value of their shares high. RBI
had found massive underreporting by Yes Bank, Axis Bank and ICICI in the tune
of thousands of crores.

While the taxpayers will have to share the burden of NPAs and refinancing of the
loans, due to the massive cash deposited in the banks due to the demonetization,
the banks have to shell out more interest on the savings. The lower financing of
new loans due to the volatile market, high unemployment, and slowdown of the
global and local economy has made the situation precarious.

As a last resort to prevent the implosion, banks like SBI, Canara Bank, etc. have
reduced the interest rates on the saving account and hiked charges for various
services offered and minimum balance. Thus again, charging the poor and the
middle-class.



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Source:
Various documents of the RBI, Ministry of Finance, Parliamentary debates, Credit
Suisse, Care Ratings, Filings by banks, and various media reports.
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Big Pie: Analysis of major sectors’ share in NPAs - 5 -

About Centre for Financial Accountability

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