Speaking to Latha Venkatesh of CNBC-TV18 in the latest episode of Indianomics Saurabh Mukherjea, Head of Equities at Ambit Capital, Krishnan Sitaraman, Senior Director at Crisil, and Ananda Bhoumik, Managing Director and Chief Analytical Officer at India Ratings & Research shared their views on the banking system stress and initiatives required to revive the sector.
On reduction of stressed assets, Saurabh Mukherjea, Head of Equities at Ambit Capital says, “There has not been any economic recovery in India. Loan book growth is around 8-10 percent. In the last 4-6 quarters, I do not think we have seen any abatement in financial stress in the system.”
The troubled sectors are steel and power and according to Mukherjea, if the power can be turned around, the rot can be addressed.
Adding to this Krishnan Sitaraman, Senior Director, Crisil says, “The debt at risk of the power sector is at around Rs 1,34,000 crore. Stress is continuing to remain at elevated levels. The only thing is that exposure to discoms will come down.”
An important question that needs to be addressed is whether the banking NPAs will rise and to this Sitaraman says that banks are now in the recognition phase and there won’t be more slippages than last year.
Bhoumik too does not see a relief for stressed companies. “As far as the operating stressed companies are concerned, so far I do not see any sign of any meaningful turnaround. I do not think the money is being used to revitalise,” said Bhoumik.
List of sale of assets by leveraged borrowers:
In the past week the sale of Essar Oil to Roseneft has made the business news media and the stock markets to wax eloquent on the sale of assets by the bad borrowers of corporate India and how bad boys are turning good and spoilt balance sheets of banks are returning to health. Here’s an impressive
The Essar Group, which probably owes Indian banks over Rs 1 lakh crore sold Essar Oil for Rs 86,000 crore. Indian bank exposure to Essar Group came down by probably Rs 45,000 crore.
JP Associates, which had total debt of Rs 75,000 crore a year ago has sold cement and power plants worth nearly Rs 35,000 crore.
The Anil Ambani Reliance Group which had debt of over Rs 1.3 lakh crore has sold or is in the process of selling nearly Rs 25,000 crore of assets of cement, roads and towers.
The Lanco Group, which has Rs 35,000 crore has sold power plants to the tune of Rs 7,000 crore.
The GMR Group with debt of Rs 43,000 crore has sold stake in power units for about Rs 2,000 crore and road projects for over Rs 1,000 crore.
GVK Infrastructure with loans of nearly Rs 24,500 crore has sold its stake in its Bengaluru Airport for Rs 2,000 crore.
Total asset sales by just five indebted groups in the past year amount to nearly Rs 1.6 lakh crore.
We are counting big asset sales, but we are counting even bigger debt, so how much is left on the balance sheets of banks? Are they at least, somewhat de-stressed? That’s the question we are asking today.
Below is the transcript of the interview of Ananda Bhoumik, Krishnan Sitaraman and Saurabh Mukherjea with Latha Venkatesh on CNBC-TV18.
Q. First up, has there been any genuine reduction in the stressed loans of banks because from the list it looks like healthy assets have been sold. Any distress at all?
Mukherjea: The way to look at it is obviously the good news in terms of some of these disposals that you mentioned makes it to the headlines. But the underlying rot which continues in the balance sheet of banks, obviously does not make the headlines. Now, the reality is there has not been any economic recovery in India. So, the result, the total corpus of stressed assets in the banking system is still in the vicinity of 15 percent of system assets, broadly the same figure that it was in percentage of assets terms compared to two years ago.
Another way to look at it is that stressed asset accumulation is continuing roughly at twice the pace at which banks’ loan books are growing. So, loan book growth is around 8-10 percent. Our reckoning is stressed asset accumulation is having more in terms of 15-20 percent. Over and above that, as your stressed assets get older, the provisioning quantum on that is rising. So, in terms of the hit of provisions, we reckon in terms of provisioning costs, provisioning charges, we will have at least two more years of elevated provisioning for banks.
Now, how much of this is the bank’s fault, how much of this is because of the fact that the economy is not recovering is a question of attribution, but in all fairness, the candid route will be that over the last 4-6 quarters, I do not think we have seen any abatement in financial stress in the system, some of the headline-grabbing disposals aside.
Q. The growth of non-performing assets (NPA) or stressed assets is at twice the pace of the growth of loans, point taken. But is it picking off?
Mukherjea: The answer depends on how you perceive two very troubled sectors. The two sectors are steel and power. So, most people out there would believe, with some degree of fairness, with minimum import price (MIP) structure has had some bearing on alleviating stress in steel. But from what we can see, in power, things are going from bad to worse. Over there, it does not really seem to have helped the power sector that much, plant load factors (PLF) remain low and the power sector stress continues.
So, you have got three dynamics at play. In terms of your quantum of stressed assets the number is growing in rupee billions. Within the stressed asset pot, the provisioning quantum is going up. As a result, the profit and loss (P&L) hit to banks will stay elevated right through this fiscal and I am reasonably sure, right through next fiscal as well. The only get out of jail card I can see is, if the power sector can be turned around, we could address the rot, but barring that, we have got two more years of elevated provisioning costs hitting Indian banks.
Q. What is your estimate of the banking system’s rot itself? I take on board everything that Saurabh has said, but at least for me, the quantum of the problem is drawn. Yes, you have to provision more and therefore, find more capital. But that 15 percent of the total banking assets that was stressed is not growing to 15.5 percent. Have we at least ring-fenced and put a number on that?
Sitaraman: Currently, we are by and large in the recognition mode and what we have seen so far is what has been recognised as NPAs or restructured as assets. That is in the region of Rs 9 lakh crore or a little above that. Of course, there are certain other assets which are yet to be recognised as NPAs which can be classified as weak assets, but I would broadly tend to agree with you that we are not expecting to see slippages which are higher than last year. So if you go back to FY15 the slippages to NPAs on an annual basis were around the 3 percent mark year-on-year (Y-o-Y). FY16 it was around 6 percent, almost doubled and this year, we are expecting it to be a little over four percent.
So, it will come down from what we have seen in the last year, but it will still take some time to go back to a long period average. But, the asset sales that you are talking about, at least it gives some cause for optimism or hope that going forward the steps towards undertaking resolution of the issue are being visible to some extent. However, the extent of the stressed asset is still at a very high level and the kind of asset sales which are happening are incrementally happening, steps in the right direction, but it will still take some time before it can make a meaningful dent into the extent of stressed assets.
Q. So, we know that the number of loans that are not getting paid back is Rs 9 lakh crore in the system out of a total bank balance sheet of Rs 100 trillion and of which corporate loan book or loans to industry is about Rs 60 lakh crore. Out of that, we know very well that Rs 9 lakh crore is not getting returned. My point is, how much of that Rs 9 lakh crore can now become Rs 8 lakh crore? And that is what Krishnan means by resolution. We all know that assets have been sold and I have a rough number of about Rs 1 lakh crore from the troubled boys itself. How much of that is coming back as capital to resolve the bad assets because if the promoters bring in the capital, for instance, if the Ruia brothers brought in that Rs 10,000 crore as capital into Essar Steel or Essar Projects, the banks can restructure those loans. How much is coming to de-stress?
Bhoumik: That is the point. While the resolution and the recovery through sale of good assets is certainly very encouraging, it could be as much as 15-20 percent of stressed assets being realised via asset sales. JP, Essar, Videocon had done some sales, so those are good signs. But how the money is being used is critical. Our sense is, from the deals that have been done in the last couple of years, most of the funds of course, partly is being used to de-lever, but I do not think much is coming in these weaker operating companies by way of additional support.
In fact, what we are seeing is for a variety of reasons, including the weak economic turnaround is that earnings before interest, depreciation and amortisation (EBITDA) in these companies effectively remain where they are. In the weak operating or stressed companies, debt levels actually go up. And therefore, it is difficult to surmise that of these stressed companies, there is any meaningful chance of their moving away from the stressed category into a better performing category.
So, banks have de-levered which is a good sign. To some extent, therefore, the quantum of stressed numbers will come down, the exposures will come down, but as far as the operating stressed companies are concerned, so far I do not see any sign of any meaningful turnaround. I do not think the money is being used to revitalise.
Q. That is the meaningful question, have nay of the promoters been able to bring in money like in the Essar case? Do you expect that money to be brought in so that banks can take a little bit of cut and Essar Steel for instances loans become serviceable and it moves from stress to distress?
Mukherjea: There is two layers to why the assets disposal of good assets is not really leading to meaningful de-leveraging in the system. One is legally speaking the good assets are distinct legal entities off turn with very different shareholders to the stressed entities. So, the legal grounds for saying I will take the asset disposal cash from good entity and transfer it to the leverage entity is obviously very feeble very flimsy. As a result in most cases I think it won’t happen.
Q. There is one common promoter?
Mukherjea: The promoters is not the borrower, right, as we memorably found out when a spirits baron defaulted in our country and he clearly said look I didn’t borrow the money the listed entity borrowed the money, go and ask them for the money. So, that point still holds valid that if a listed entity has taken money you can’t pin the promoter down.
Now if the promoter has some personal debt or the holding company has debt where the promoter has put his own assets as collateral sure the banks can go after it. However, promoters are clever people and they haven’t been foolish enough to give personal guarantees in most cases.
So, when the newspapers and the headlines shout out that big deleveraging deal done, I wonder what the party is about because the shift of cash from the good entity to bad entity there is no legal bases to pull this on.
Q. This is on legal bases but moral suasion or even outright arm twisting is possible now you think?
Mukherjea: I think there is a limited grounds to believe that Indian banks can pull that off. It hasn’t happened in the last 20 years, suddenly difficult to see why suddenly Indian bank’s grip on promoters will radically change. I know the bankruptcy law has gone through, but in most cases that really is not applicable here.
Q. If the political authorities were to put their weight behind it this could happen yet again?
Mukherjea: So, that is the political question you have to put to the politicians. From where I am sitting as an analyst the cold dry figures and the law of the land doesn’t give the banks that much course of power. There is another underlying problem, the other problem is the economy keeps on staying very soft and CAPEX intensive sectors my reckoning is as I have said on your other program the CAPEX sector has actually softening further, investment sector is softening further.
If you look at the percentage of borrowers in India who is interest cover is less than 1, who don’t even generate enough EBITDA to cover their interest that ratio is constant for the last four-eight quarters at 40 percent. So, if you are underlying borrower constituency itself is sick it will be a miracle, if in the stress constituency you see an improvement in credit quality. The two simply don’t stack up vis-a-vis each other.
Q. You all have this exhaustive report on Power. Are you getting a sense that any of the power sector units can be pulled out because of a possibly returning health of discoms?
Sitaraman: The way we have looked at this power sector is in two parts – one is generation and transmission companies and the distribution companies. The way we are looking at it is in the next three to five years time, the banks and financial institutions exposure to discom is going to come down significantly as these loans are going to be taken over by the state governments which are then going to be the principal financers to the distribution companies.
Having said that what we are looking at is in terms of the debt at risk that is remaining at a steady level vis-a-vis the last year we had put out a similar number. The debt at risk of the entire sector is at around Rs 1,34,000 crore is what we have put out that is in between Rs 1,70,000 crore is towards projects which are operational projects and there are around Rs 64,000 crore which are at risk to project which are under construction. So put together the entire sector we believe that debt at risk is around Rs 1,34,000 crore.
However, what we are also seeing is the exposure of banks and financial institutional essentially that is Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) to discoms will come down but that to generating companies will keep going at a steady rate of around 12 percent over the next three to five years. So, the stress is continuing to remain at elevated levels. The only thing is that exposure to discoms will come down.
Q. Do you think that the problem is going to grow because if you do not do anything about the stressed loans, the sheer accumulation is going to make the load look larger. So, are we going to sit at Rs 9 lakh crore of stressed assets or is that going to grow simply because of the interest accumulation?
Bhoumik: There will be a P&L impact because which has already been discussed because of sheer ageing. Therefore, next year for sure will actually worsen as far as credit costs are concerned. But, I would not be that bearish as far as accumulation on interest is concerned. The bigger point is, at some stage, banks would need to take haircut. We had pointed this out last year. We said that the quantum of the haircut would be as much as Rs 1 trillion, that seems a large number at that stage, but we still hold by that. And till such time banks really address this, none of this is meaningfully going to help. The cycle is not turning anytime soon, capital cycle is weak, as we have seen. Therefore, it is really difficult to build a case or a model to suggest, forget easing, but probably just stagnant at where they are.
Q. Last thoughts from your Saurabh? Do you see that banks will be able to arm-twist some of the promoters or even convince simply because steel, after the MIP is like USD 440, you are able to service the loan if it is probably half of what it is? So do you think that at least one of the big steel units will turn to be de-stressed because of an application of this Scheme for Sustainable Structuring of Stressed Assets (S4A), any resolution?
Mukherjea: Obviously, in India, the fact that 7-9 very powerful corporate groups have a lot of debt is well known, it is also well known that we have a five year election cycle. If arm-twisting had to be done, that would have had to be done in the early part of the five year election cycle. As we get into the business and of a five year election cycle in India, it is very difficult to see who or how you will arm-twist these mega corporates. And the very fact that you mentioned the list of impressive disposals right at the beginning of the programme, there were four of them in the space of two years of plenty of heartburn and angst about the debt in the banking system.
So, the best opportunity to arm-twist these large corporates is gone and as we get into the thick of large state elections and ultimately, the general election, the balance of power will clearly shift towards the larger corporates which means bad news for the Indian banks.
Q. Do you see any resolution? Will that Rs 9 lakh crore become Rs 8 lakh crore?
Bhoumik: No, I do not think it is going to be that dramatic. A lot of it depends upon – we have discussed this – how that money is utilised, not much of that is coming to the de-stressed operating companies. Therefore, unless the commodity cycle were to turn significantly, which is unlikely over the next couple of years, it would probably stagnate at these levels for some time.