Indian banks 2nd only to Chinese counterparts in exposure to risks: Moody's

This is due to large loans are given to businesses with poor repayment capacity, it said

Indian banks' exposure to risks has risen and is now second only to those in China in the Asia-Pacific (APAC) region due to large loans given to businesses having poor repayment capacity, ratings agency Moody's Investors Services has reportedly said. 

According to a LiveMint report published on Thursday, the Moody's report said that while India's overall credit penetration remained low, its banks' exposure to corporate borrowers that have poor debt servicing capacity has increased the risks of defaults. Further, the financial daily said while citing the agency's report, while in India, private sector credit as a percentage of the gross domestic product was the third lowest in the region, a significant part of it was owed by businesses that have poor repayment capacity. Private sector credit also includes debt owed by the private non-financial sector and households.

"Specifically, systems like China, India, Indonesia, and Singapore report high concentration of corporate leverage among borrowers with low debt servicing capability," the Moody's report was quoted as saying by the financial daily.

As reported earlier, Moody’s Investors Service on November 2017 upgraded India's sovereign bond rating by a notch for the first time in 14 years, showing confidence in the Narendra Modi government’s reform initiatives such as demonetisation, the goods and services tax (GST) and its efforts to resolve the bad debt asset crisis of banks. Further, Moody's also raised long-term ratings of four Indian financial institutions – State Bank of India (SBI), HDFC Bank, EXIM India and Indian Railway Finance Corporation (IRFC) – to 'Baa2' from 'Baa3'. 

Over 15% of Indian corporate debt owed by firms that can't service their interest payments

How bad is the situation? The ratings agency, according to the financial daily, assessed a business' debt servicing facility based on its interest coverage ratio, where a reading below one means that the firm's earnings are not enough to cover its interest payments. Over 15 per cent of the overall corporate debt in India is owed by businesses with an ICR that is less than one. "In India, we observe that the high share of debt owed by weak corporates is explained by a relatively small number of very large borrowers," the ratings agency's report was quoted as saying by the news report. 

The report comes as India prepares a bank re-capitalisation programme. As reported on Wednesday, according to official sources, the finance ministry is in the process of fixing the nuts and bolts of the Rs 1.35 lakh crore recapitalisation bonds for public banks and the framework is expected to get a nod from the finance minister in the next few days. 

Last month, Finance Minister Arun Jaitley had announced an unprecedented Rs 2.11 lakh crore two-year roadmap to strengthen public sector banks. The plan included re-capitalisation bonds of Rs 1.35 lakh crore.

Indian and Chinese banks most exposed

As reported earlier, the Moody's report said that Indian and Chinese banks are the most exposed to high corporate leverage risks, followed by those in Indonesia, Vietnam, Korea, and Hong Kong. However, the report said that the buildup of such debt has slowed down of late. 

"Elevated and rising private leverage represent a negative credit development for these banks, because this undermines the resilience of borrowers to economic shocks, and constitutes a structural banking system vulnerability," Moody's senior vice president Christine Kuo said in the report.

Unusually long period of low interest rates to blame

According to agency reports, the ratings agency blamed the high leverage levels in the region to the unusually long period of low interest rates.

However, according to the LiveMint report, Moody's sees interest rates remaining low in the coming years, with the high leverage being "gradually" absorbed by the region's economic growth.

Private sector credit as a percentage of GDP rose in 12 of the 14 major Asian systems over the past decade, led by China, Hong Kong, Singapore, Korea and Vietnam, the report added. 

Moody's Vice-President and Senior Credit Officer Eugene Tarzimanov noted that banks are not only exposed to direct default risks on their exposures, but also to an economy's broader adjustments to a debt overhang, including the risk of a slowdown and deep asset price corrections.

Vulnerabilities exist in the region's banking sector although the current slowdown in debt accumulation in most markets and higher economic growth expectations are both positive, said the report, which covered Australia, China, Hong Kong, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, The Philippines, Singapore, Taiwan, Thailand, and Vietnam.