debt crisis decoded - rbsa advisorsrbsa.in/archives_of_research_reports/debt-crisis-decoded.pdf ·...

20
Valuation Investment Banking Advisory Services Unmasking the Mystery of Stressed Assets in the Indian Banking System March 2016 | RBSA - Research Initiative https://rbsa.in Debt Crisis Decoded

Upload: doanmien

Post on 10-Aug-2018

221 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

• Valuation

• Investment Banking

• Advisory Services

Unmasking the Mystery of Stressed Assets in the Indian Banking System

March 2016 | RBSA - Research Initiative https://rbsa.in

Debt Crisis Decoded

Page 2: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 2 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

Preface

Banking system acts as a catalyst in economic growth of a

country. For a country like India, which aspires to become a

growth engine of the world, need of developed and well managed

banking system is inevitable. Banking system accelerates capital

formation, mobilizes saving, finances commercial activities and

also helps country to implement monetary policy. Indian

government is extensively looking at financial inclusion as an

effective tool in bringing millions of its citizen out of poverty.

Today, India is at a sweet spot and this does not come so often.

We are probably at a stage where USA was in early forties (period

of baby boomers) and China was in late seventies (period of

economic liberation). Indian Economy has all the ingredients like

favorable commodity prices, lowering inflation, growth oriented

monetary policies and better fiscal discipline to become a

formidable force in global economy.

But there is a dent in this shining Indian growth story in the form

of mounting stressed loans in the banking system. We have seen

the failure of financial system in 2008 and its massive impact on

global economy. India at this juncture cannot afford an ailing

banking system. Through this report we have estimated how deep

this dent is.

Page 3: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 3 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

Downward Spiral of Indian Banking System

Deteriorating Asset Quality

2 Years CAGR in listed public sector Banks

Advances

GNPA

9%

35%

Source: RBI, RBSA Research

4,0

55

,87

4

45

,90

,45

8

4,9

16

,11

3

4,7

94

,00

6

155,890 216,739

267,065

285,374

-

50,000

100,000

150,000

200,000

250,000

300,000

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

FY 13 FY 14 FY 15 FY 16 Q1

Gross NPA Movement: Public Sector Banks

Total Advance (in INR Cr) Gross NPAs (in INR Cr)

1,3

15

,27

7

1,5

11

,31

7

1,7

75

,26

3

1,8

17

,03

1

27,965 34,321

42,343 44,429

-

10,000

20,000

30,000

40,000

50,000

-

500,000

1,000,000

1,500,000

2,000,000

FY 13 FY 14 FY 15 FY 16 Q1

Total Advance (in INR Cr) Gross NPAs (in INR Cr)

Gross NPA Movement: Private (Indian+Foreign) Sector Banks

2 Years CAGR in all listed private sector Banks

Advances

GNPA

18%

26%

Page 4: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 4 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

Downward Spiral of Indian Banking System

Deteriorating Asset Quality

Public Sector Banks

GNPA

RSA1

5.95%

8.15%

Source: RBI, RBSA Research 1. RSA= Restructured Standard Advances

3.84%

4.72% 5.43%

5.95%

2.13% 2.27% 2.39% 2.45%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

FY 13 FY 14 FY 15 FY 16 Q1

Gross NPA Movement

Public Sector Banks Private (Indian+ Foreign) Sector Banks

6.90% 7.10% 8.16% 8.15%

1.55% 2.01% 2.10% 1.92%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

FY 13 FY 14 FY 15 FY 16 Q1

RSA Movement

Public Sector Banks Private (Indian+ Foreign) Sector Banks

Stressed Assets 14.1%

Private Sector Banks

GNPA

RSA1

2.45%

1.92%

Stressed Assets 4.37%

Downward Spiral of Indian Banking System

Page 5: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 5 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

Declining Performance

FY16Q3 financial numbers reported by Indian banks are one of the worst in the last few years. Performance of Indian public sector banks deteriorated significantly as all listed public sector banks cumulatively reported PAT level loss of INR 10,653 Cr during FY16Q3. Public sector banks reported muted revenue growth of 1%, while their operating profits dipped by 6% on YoY basis.

Private sector banks performed better compared to public sector banks though performance was muted when compared to their historical performance.

Downward Spiral of Indian Banking System

in INR Cr Total Income Operating Profit Profit after Tax

FY 16 Q3 FY 15 Q3 Var % YoY FY 16 Q3 FY 15 Q3 Var % YoY FY 16 Q3 FY 15 Q3 Var % YoY Sample Select Public Sector Banks

Allahabad Bank 5030 5387 -7% 860 1075 -20% -486 164 Loss in FY 16 Q3

Andhra Bank 4801 4541 6% 1030 923 12% 34 202 -83%

Bank Of Baroda 11727 11808 -1% 1704 2339 -27% -3342 334 Loss in FY 16 Q3

Bank Of India 11087 11947 -7% 1409 1865 -24% -1506 173 Loss in FY 16 Q3

State Bank Of India 67594 64605 5% 12734 12106 5% 1374 3893 -65%

All Listed Public Sector Banks 203534 202046 1% 33015 34991 -6% -10653 7881 Loss in FY 16 Q3

Sample Private Sector Banks

Axis Bank Ltd. 12531 10929 15% 3985 3315 20% 2175 1900 15%

DCB Bank Ltd. 477 404 18% 84 68 23% 41 43 -3%

Dhanlaxmi Bank Ltd. 309 345 -10% -10 6 Loss in FY 16 Q3 -56 17 Loss in FY 16 Q3

HDFC Bank Ltd. 18283 14931 22% 5736 4779 20% 3357 2795 20%

ICICI Bank Ltd. 17563 15527 13% 6560 5037 30% 3018 2889 4%

All Listed Private Sector Banks 73924 63754 16% 22055 17676 25% 11522 10163 13%

Source: ACE Equity, RBSA Research

Page 6: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 6 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

Downward Spiral of Indian Banking System

15,000 16,000 17,000 18,000 19,000 20,000 21,000 22,000 23,000 24,000

19

-Fe

b-1

5

28

-Fe

b-1

5

11

-Mar

-15

20

-Mar

-15

31

-Mar

-15

13

-Ap

r-1

5

23

-Ap

r-1

5

5-M

ay-1

5

14

-May

-15

25

-May

-15

3-J

un

-15

12

-Ju

n-1

5

23

-Ju

n-1

5

2-J

ul-

15

13

-Ju

l-1

5

22

-Ju

l-1

5

31

-Ju

l-1

5

11

-Au

g-1

5

20

-Au

g-1

5

31

-Au

g-1

5

9-S

ep

-15

21

-Se

p-1

5

1-O

ct-1

5

13

-Oct

-15

23

-Oct

-15

3-N

ov-

15

13

-No

v-1

5

24

-No

v-1

5

4-D

ec-

15

15

-De

c-1

5

24

-De

c-1

5

5-J

an-1

6

14

-Jan

-16

25

-Jan

-16

4-F

eb

-16

15

-Fe

b-1

6

Performance of Bankex 21,957

16,274

Source: BSE

26% drop in value in last one year

Investors have duly noted the subdued performance of Indian Banks. Bankex – An Index that tracks banking stocks has gone down by 26% in last one year. Among the banks, public sector banks are the worst performers. As on February 19, 2016, all public sector banks were trading below their book value. On the same date, all private sector banks barring four were trading at a price more than their book value. On an average PSU Banks have lost more than 44% of their market capitalization in last one year. During the same period private sector banks lost 26% of their market capitalization.

Deteriorating Market Value

Price to Book Value as on 19th Feb 2016

Private Sector Bank*

Public Sector Banks*

1.56

0.39

Source: ACE Equity, RBSA Research* All listed private and public sector banks

Page 7: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 7 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

Downward Spiral of Indian Banking System

Weak Fundamentals of Indian Corporates

Parameter % of Total Companies Share in Total Debt

Sep-14 Mar-15 Sep-15 Sep-14 Mar-15 Sep-15

Negative net worth or Debt to Equity >=3 13.6% 14.2% 15.3% 22.9% 23.0% 24.9%

Source: RBI's Fianancial Stability Report, 2015, RBSA Research

Growing number of weak companies As per the financial stability report of RBI dated December 2015, proportion of weak companies (Non Government Non Financial Companies with negative net worth and DE>=2) has increased from 13.6% as of Sep 2014 to 15.3% as of Sep 2015. During the same period, share of weak companies in total debt has increased from 22.9% to 24.9%. Deteriorating Profitability Profitability as measured by return on equity has decreased from FY12 to FY14 across all types of the companies. Profitability of small and medium enterprises eroded more than large corporations. Weak debt servicing capability During the same period, debt servicing capacity as measured by interest coverage ratio has also decreased significantly.

Page 8: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 8 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

How Banks Mask Bad Debts?

Banks are provided with various tools by RBI to restructure assets so that they can manage their loan portfolio efficiently, but these very tools are being misused by banks to mask their bad assets.

Corporate Debt Restructuring (CDR)

Corporate debt restructuring was designed to revive the stressed corporates and to ensure the recovery of the debt issued to these corporates. CDR scheme had a very rough time so far. As of 31st December 2015, only 16% of the CDR cases were successful. Failure of CDR mechanism indicates banks’ inability to assess borrowers ability and willingness to meet their restructuring commitment. CDR schemes may have been used by banks to delay the recognition of bad debts rather than solving the underlying problem.

Source: CDR Cell

CDR cases have gone up from 443 as of Dec 13 to 530 as of Dec 15

443

520 530

380

400

420

440

460

480

500

520

540

Dec-13 Dec-14 Dec-15

CDR Cases

CDR outstanding as % of total lending in Indian banking system has gone up from 5% as of Dec 2013 to 6.10% as

of Dec 2015

2,8

9,2

98

3,8

0,8

85

4,0

3,0

04

5.05%

6.02% 6.10%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

0

100000

200000

300000

400000

500000

Dec-13 Dec-14 Dec-15

CDR outstanding

CDR o/s(in INR Cr) CDR as % of agrregate loan

Page 9: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 9 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

How Banks Mask Bad Debts?

Failed Cases 38%

Successful Cases 16%

Live Cases 46%

Status of CDR cases as of Dec

15

Classification of live cases across top five Industries

Industry Number of cases Debt (INR Cr) % share

Iron & Steel 52 54051 21%

Infrastructure 19 42823 17%

Engineering 12 25484 10%

EPC 5 23522 9%

Construction 11 18644 7%

As on Dec 2015, 38% of the CDR cases (worth INR 83,552 Cr) have failed as per the data reported by CDR cell. Number of failed CDR cases shot up from 22% as on Dec 2013 to 29% as on Dec 14 and eventually to 38% as on Dec 2015 which indicates systematic failure of CDR scheme. Also, as on Dec 2015, 16% of the CDR cases were successful where as 46% were still under CDR mechanism (“live CDR cases”). Most of the live CDR cases are in stressed sectors such as Iron & Steel (21% cases), Infrastructure (17% cases) and Engineering (10%). Stressed sectors may take few more years for complete revival and some portion from the live cases may fail. This could result into failed cases going beyond 38% in future. RBI has recently introduced other restructuring mechanisms such as SDR and 5:25 to overcome the limited success it had with traditional CDR schemes.

Source: CDR Cell

29,038 50,104

83,552 22%

29%

38%

0%

10%

20%

30%

40%

50%

0

20000

40000

60000

80000

100000

Dec-13 Dec-14 Dec-15

Failed CDR Cases

Failed CDR cases (in INR Cr) failed cases as % of total cases

Page 10: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 10 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

How Banks Mask Bad Debts?

Strategic Debt Restructuring (SDR)

SDR scheme allows banks to convert the outstanding loan into equity and eventually acquire majority control of the entity. Ultimate objective is to improve the financial performance of ailing company and eventually recover the dues. Banks across public and private sectors have invoked SDR as it allows stressed debt to be classified as “Standard” for eighteen months. Equity shares of the companies which are under SDR scheme are trading at extremely low prices. Conversion of debt into equity in these companies will barely yield anything to the banks as most have Outstanding Debt Obligations to the tune of 17 to 57 times of their respective Market Capitalization.

52

0

20

6

71

8

37

8

18

2

14

0

59

18

7

28

15

00

0

11

70

5

10

23

5

75

00

30

94

23

56

22

80

20

00

12

08

29

57

14

20 17 17

39

11

43

0

10

20

30

40

50

60

0

2000

4000

6000

8000

10000

12000

14000

16000

Gam

mo

n In

dia

Mo

nn

et

Isp

at

Ele

ctro

ste

el C

asti

ngs

IVR

CL

Vis

a St

ee

l

Jyo

ti S

tru

ctu

res

Ro

hit

Fe

rro

-Te

ch

GO

L o

ffsh

ore

Ltd

An

kit

Me

tal &

Po

we

r

Market Capitalisation (INR Cr) Debt Amount (INR Cr) Debt / M.Cap (RHS)

Source: News article, RBSA Research

Page 11: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 11 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

SDR Cases

How Banks Mask Bad Debts?

Name of the Company

Date of SDR Announcement

Debt (in INR Cr)

Adnunik Power and Natural Resources

Dec-15 3116

AMW Motors Dec-15 1432

Ankit Metal & Power

Dec-15 1208

Electrosteels Steels

Oct-15 10235

Gammon India Nov-15 15000

GOL offshore Ltd Dec-15 2000

IVRCL Sep-15 7500

Jyoti Structure Aug-15 2356

Lanco Testa Aug-15 2400

Monnet Ispat Aug-15 11705

Rohit Ferro-Tech Nov-15 2280

Shiv-Vani Oil Sep-15 3500

Transstroy Dec-15 4300

Visa Steel Sep-15 3094

Source: News articles, RBSA Research

SDR may result in deferring of NPA recognition of : INR 1.5 Lac Cr/ USD 23 bn representing 2.2% of total advances of Indian banking system

As per ‘’SDR: A band-aid for a bullet wound’’ by Religare Institutional Research

SDR scheme requires the change in management so that stressed companies can be managed better but SDR may be used by existing errant promoters to buy back the assets of their own companies at much cheaper price by floating shell companies. RBI has recently sent a note to banks where it has asked banks to establish that there is no connection between new buyer and current promoter of the company. Restructuring loans under SDR may require banks to put additional funds into the company to make it operationally viable. Most of the restructuring schemes have moratorium period where interest payment is funded by additional debt which results in increased banking exposure to stressed companies. SDR companies are operating in the stressed sectors like infrastructure, power, metals and mines and may take few years for revival. As most of the SDR cases are from failed CDR cases, restructuring these loans through SDR would result in simply delaying the recognition of bad assets.

Page 12: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 12 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

5:25 Scheme

The 5:25 flexible structuring scheme allows bankers to fix longer amortization period for loans to projects in the infrastructure and core industries sector, for 25 years, based on the economic life of the project, with periodic refinancing/restructuring every 5 years. Refinancing essentially means giving new loan so that the older loan can be repaid and new loan can be started on better terms for the borrower.

As with other debt restructuring mechanisms, 5:25 schemes may require banks to infuse additional debt into stressed companies which would further increase the banking sector’s exposure to stress companies. Most of the stress companies would require the additional debt funding even to pay the interest on the old loans.

Banks can misuse 5:25 scheme as loan restructured under this scheme is not treated as bad loan in their books. This will result in lower provision and artificially showing healthy picture of assets. It will ultimately delay recognition of non performing assets and it may also result in higher losses in future due to additional funding that would require in 5:25 scheme.

How Banks Mask Bad Debts?

5:25 Refinancing Cases

Name of Organisation Debt (in INR Cr)

Adani Power 15,000

Bhushan Steel 35,000

Essar Ports 6,000

Essar Power 3,300

Essar Steel 14,500

JP Infratech 10,300

JSW Energy 6,000

Uttam Galva 1,300 Source: News articles, RBSA Research

Page 13: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 13 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

Disclosed Stressed Advances

According to RBI’s Financial Stability Report - December 2015, 11.2% of the overall credit exposure of Scheduled Commercial Banks as on June, 2015 is classified as stressed1.

69.3

13.6

3.3

5.9

7.9

Industry

Services

Retail

Agriculture

Food Credit

Share in Total Stressed Advances - %

1. Stressed Advances = Gross NPAs + Restructured Standard Advances

Sectors Total Exposure

(INR Bn)

% Disclosed

Stressed

Disclosed Stressed

Advances (INR Bn)

Iron and Steel 982.8 27.0 265.4

Power 5,730.5 23.8 1,366.0

Telecommunication 892.5 14.2 127.2

Aviation 1,208.0 60.0 724.8

Other Industry 17,487.7 15.1 2,645.5

Industry 26,301.5 19.5 5,128.8

Services 14,331.3 7.0 1,003.2

Retail 12,134.7 2.0 242.7

Agriculture 7,946.5 5.5 437.1

Food Credit 5,396.4 10.9 586.0

Total 66,110.4 11.2 7,397.7

In our report, we are analyzing the health of exposures to the Industrial and Services sector which account for ~ INR 40,633 Bn (~61.5%) of the overall banking sector exposure of INR 66,110.4 Bn.

Source : RBI

Page 14: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 14 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

Unmasking the Stressed Advances

In our opinion, disclosed stressed advances as on June, 2015 from the industry and services sector are not indicative of the real chunk of stressed loans lying as assets in balance sheets of the Indian Banking Sector. To support our hypothesis, we have subjected companies from the above sectors in our sample to Altman’s Z Score Model for Emerging Markets. Our sample covers 1,609 companies with total outstanding debt of INR 17,869 Billion.

Altman’s Z Score for Emerging Markets:

Altman’s Z Score Model is a linear combination of four ratios weighted by coefficients. The model is formulated as follows:

Z Score = 6.56 X1 + 3.26 X2 + 6.72 X3 + 1.05 X4, Wherein – 1) X1 = Net Working Capital / Total Assets which is a measure of company’s liquidity,

2) X2 = Retained Earnings / Total Assets which measures profitability reflecting company’s

earning power,

3) X3 = Earnings Before Interest and Taxes / Total Assets which is a measure of company’s operating efficiency apart from tax and leveraging factors and stresses importance to company’s long term stability,

4) X4 = Book Value of Equity / Total Assets which factors in the fluctuation in value of equity as a possible red flag.

The Interpretation of Altman’s Model is as follows – Z < 1.1 means STRESS zone, 1.1 < Z< 2.6 indicates GRAY zone, Z > 2.6 reflects SAFE zone.

Empirical studies suggest that there is 70% probability, that a company categorized in Stress Zone will default in repayment of its outstanding debt obligation.

Altman’s Z Score is used to predict the probability that a firm will go into bankruptcy. They are primarily used predict corporate defaults and act as a control measure for the financial distress status of companies. The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a company.

Source : RBI’s Financial Stability Report, Dec 2015, RBSA Research

Page 15: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 15 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

Unmasking the Stressed Advances

In support of our hypothesis, Altman’s Z Score revealed that potentially ~33% of the debt to the industrial sector ~ 28% debt to the services sector are Stressed, as compared to disclosed figures of ~19.5% and ~7% as stated in the Financial Stability Report, Dec 2015 respectively for quarter ending June 2015.

19.5 19.5 19.5

13.7 13.7 13.7

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Disclosed Stressed AsPer Financial Stability

Report, 2015 (%)

Potential AdditionalStressed (%)

Stressed As Per ZScore (%)

Stressed Advances - Industry

7.0 7.0 7.0

21.5 21.5 21.5

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Disclosed Stressed AsPer Financial Stability

Report, 2015 (%)

Potential AdditionalStressed (%)

Stressed As Per ZScore (%)

Stressed Advances - Services

33.2

28.5

Source : RBI, RBSA Research

27.0

23.8

14.2

60.0

42.9

49.2

53.3

78.4

0.0 20.0 40.0 60.0 80.0 100.0

Iron & Steel

Power

Telecom

Aviation

Stressed As Per Z Score (%)

Disclosed Stressed As Per Financial Stability Report, 2015 (%)

Stressed Advances in Key Stressed Industries

Page 16: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 16 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

Unmasking the Stressed Advances

The amount of stressed assets in the Industry and Services sector is expected to increase by ~71% and 3X to ~INR 8715 Bn and ~INR 4079 Bn respectively. This translates to potential addition of ~INR 3586 Bn in stressed assets from Industry and ~INR 3076 Bn in stressed assets from Services sector.

67.5%

32.5%

Key Stressed Industries Other Industries

As per Altman's Z Score

~2/3rd of the potentially additional stressed assets in industry are from Key Stressed Industries (KSI - Iron & Steel, Power, Telecom and Aviation). Thus, KSI’s share of stressed asset in industry is expected to rise from 48.4% to 53.5%.

Of the widely disintegrated services sector, Hotels & Restaurants, unlisted IT – Software and TV Broadcasting sectors are estimated to contribute to ~18%, ~16% and ~12% of the stressed advances from services sector respectively.

Source : RBI, RBSA Research

48.4%

51.6%

As per Financial Stability Report, Dec 2015

53.5%

46.5%

As per Altman’s Z Score

26

5 1

36

6

12

7

72

5

24

83

26

46

51

29

10

03

42

2

28

19

47

6

94

7 46

64

40

51

87

15

40

79

0

2000

4000

6000

8000

10000

Iron &Steel

Power Telecom Aviation KSI OtherIndustries

Industry Services

Stressed Advances as per Financial Stability Report, 2015 (INR Bn)Stressed Advances As per Z Score (INR Bn)

Page 17: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 17 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

Unmasking the Stressed Advances

Empirical studies suggest that ~70% of the companies in the Stress Zone are expected to default on the outstanding debt obligations. Inculcating the same conclusion in our studies on the 70% companies with poorest Z Scores, we have estimated that the total amount of default on loan obligation can potentially extend to INR 7,918.2 Bn or to ~19.5% of overall exposure to Industry and Services.

Source : RBI, RBSA Research

25

3

10

19

20

7 66

3

18

89

28

99

47

87

31

31

26%

18%

23%

55%

21%

17% 18%

22%

0%

10%

20%

30%

40%

50%

60%

0

1100

2200

3300

4400

5500

Iro

n &

Ste

el

Po

we

r

Tele

com

Avi

ati

on

KSI

Oth

er

Ind

ust

rie

s

Ind

ust

ry

Serv

ice

s

Estimated Default (INR Bn) Default to Total Exposure (%)

42

2

28

19

47

6

94

7

46

64

40

51

87

15

40

79

60%

36% 43%

70%

40%

72%

55%

77%

0%

20%

40%

60%

80%

100%

0

2000

4000

6000

8000

10000

Iro

n &

Ste

el

Po

we

r

Tele

com

Avi

ati

on

KSI

Oth

er

Ind

ust

rie

s

Ind

ust

ry

Serv

ice

s

Stressed Advances As per Z Score (INR Bn)

Default from Stressed Advances Expected In Debt by 70% Companies (%)

Page 18: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 18 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

With a potential of default lurking at a staggering 19.5% (amounting to INR 7,918.2 Bn) from advances relating to Industry and

Services Sectors (which account for ~61.5% of the overall banking sector exposure), a clean up in the Indian Banking System is the need of the hour. A clean and transparent banking system would indeed spur growth, build in accountability and help create a stable economy in the long term. The failure of the CDR system and the challenges related to the SDR and 5:25 debt restructuring scheme have made it difficult to estimate a fair picture of stressed loans in the Indian Banking System. To build in accountability and to overcome these challenges, RBI had recently conducted an Asset Quality Review of banks and had identified specific accounts which the banks had to classify as Non Performing Assets by March 2016. These specified accounts would be classified as NPAs regardless of their repayment structure or restructuring scheme. The said exercise has resulted in an increase in the amount of overall gross NPAs of the listed banks (which cater to ~ 89% of total exposure of the Indian Banking System) to the tune of 46% to INR 4,217.4 Bn in December 2015 from March 2015. Consequently, the share of overall Gross NPAs to overall exposure has increased from 4.4% in March 2015 to 6.0% in December, 2015. Though we appreciate RBI’s initiative which aims to clean the entire banking space by March 2017, we believe that the amount of standard advances awaiting to get classified as NPAs is much higher than what has been disclosed by banks.

Conclusion

“If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has.” ― John Maynard Keynes

Page 19: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 19 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

Disclaimer The purpose of this Document is to provide interested parties with information that may be useful to them in understanding the content related to this document. This Document includes statements which may reflect various assumptions and assessments arrived at by the RBSA Analysts. Such assumptions, assessments and statements do not purport to contain all the information that each interested party may require. This Document may not be appropriate for all Persons, and it is not possible for the RBSA, its employees or advisors to consider the investment objectives, financial situation and particular needs of each party who reads or uses this Document. The assumptions, assessments, statements and information contained in the Document may not be complete, accurate, adequate or correct. Each interested party should, therefore, conduct its own investigations and analysis and should check the accuracy, adequacy, correctness, reliability and completeness of the assumptions, assessments, statements and information contained in this Document and obtain independent advice from appropriate sources. Information provided in this Document has been collated from several sources some of which may depend upon interpretation of Applicable Law. The information given is not intended to be an exhaustive account of statutory requirements and should not be regarded as complete. RBSA accepts no responsibility for the accuracy or otherwise for any statement contained in this document. RBSA, its employees and advisors make no representation or warranty and shall have no liability to any Person under any law, statute, rules or regulations or tort, principles of restitution or unjust enrichment or otherwise for any loss, damages, cost or expense which may arise from or be incurred or suffered on account of anything contained in this Document or otherwise, including the accuracy, adequacy, correctness, completeness or reliability of the Document and any assessment, assumption, statement or information contained therein or deemed to form part of this Document. We have analysed the sample of 1,609 companies to opine on the industrial and service sectors of the Indian economy. Our analysis assumes that the conclusions and inferences derived on sample can be extended to a population. Our analysis is subjected to the limitations which are inherent to the method of sampling. Limitations of sampling include inadequacy of the samples, chances of bias, problem of accuracy and non-representative sample among others. Also, our analysis widely depends on Z Score Model. However, the model has its own limitations in the form of past financial results not being indicative of the future. Also, the Z score is applicable to all emerging nations, however a slight change in the coefficients of its measures suiting the macroeconomic factors specific to India may yield a slightly differentiated inference. RBSA also accepts no liability of any nature whether resulting from negligence or otherwise howsoever caused arising from reliance of any person upon the statements contained in this document.

Page 20: Debt Crisis Decoded - RBSA Advisorsrbsa.in/archives_of_research_reports/Debt-Crisis-Decoded.pdf · Debt Crisis Decoded: ... Gross NPA Movement . ... Banks are provided with various

Pg. 20 of 20 Debt Crisis Decoded: Unmasking the Mystery of Stressed Assets in Indian Banking System

Contact Us

Research Analysts:

Tushar Shinde Vatsal Shah Vikas Biyani

+91 22 6130 6066 +91 22 6130 6069 +91 22 6130 6075

[email protected] [email protected] [email protected]

India Offices:

Mumbai Office:

21-23, T.V. Industrial Estate, 248-A,

S.K. Ahire Marg, Off. Dr. A. B. Road, Worli,

Mumbai - 400 030

Tel : +91 22 6130 6000

Delhi Office :

9 C, Hansalaya Building,

15, Barakhambha Road, Connaught place,

New Delhi -110 001

Tel : +91 11 2335 0635

Bangalore Office:

Unit No. 104, 1st Floor, Sufiya Elite, #18,

Cunningham Road, Near Sigma Mall,

Bangalore - 560052

Tel : +91 80 4112 8593

Ahmedabad Office:

912, Venus Atlantis Corporate Park,

Anand Nagar Rd, Prahaladnagar,

Ahmedabad - 380 015

Tel : +91 79 4050 6000

Surat Office:

37, 3rd Floor, Meher Park,

‘A’, Athwa Gate, Ring Road,

Surat - 395 001

Tel : +91 261 246 4491

Jaipur Office:

Karmayog, A-8, Metal Colony,

Sikar Road,

Jaipur - 302 023

Tel : +91 141 233 5892

Global Offices:

Singapore Office:

17,Phillip Street ,

#05-01,Grand Building,

Singapore-048 695

Email: [email protected]

Dubai Office :

ABCN, P. O. Box 183125

4th Floor, Block-B, Business Village, Deira

Dubai U.A.E.

Tel : +971 4 230 6084

Email: [email protected]

New York Office:

24 Mission Dr.

Monroe Township,

NJ 08831, USA

Tel: +1 813 751 6474

Email: [email protected]

Management:

Rajeev R. Shah | Managing Director & CEO Manish Kaneria | Director Gautam Mirchandani | Director

+91 93237 39669 / 97243 43870 +91 97243 44445 +91 90040 50600

[email protected] [email protected] [email protected]