PSU Debt A Serious Concern for Indian Banks

Alchemist

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#1
Debt taken by government companies can cause serious problems for Indian banking sector.

Many government companies are carrying debt that they are in no position to repay. Indian banks are yet to provide for these debt as the companies have not defaulted, but the situation will worsen significantly if serious action is not taken by governments in India.

Some of the companies/sectors where Indian banks have significant exposure are:

Air India: Rs 47000 crore of debt. (networth fully eroded).
State Electricity Boards: Rs 200000 crore of debt. (networth fully eroded).
Oil Marketing Companies: Rs 120000 crore of debt. (no position to repay the debt, but can keep paying interest and operating as long as oil prices stay around current levels - Brent at $110 and WTI at $85. Debt:equity ratios are getting worse every year).

All the above companies will need serious bailouts from the central government in future. (State governments already have huge deficits and they can't be expected to recapitalize the SEBs).

Now, compare these figures with the networth of top 10 banks in India:

SBI 64986 crore.
ICICI Bank 55090 crore.
HDFC Bank 25379 crore.
PNB 21508 crore.
Bank of Baroda 20993 crore.
Canara Bank 20039 crore.
Axis Bank 18998 crore.
Bank of India 17290 crore.
IDBI Bank 14567 crore.
Union Bank 12764 crore.

The total is little over Rs 270000 crore.

(Compared to private banks, government banks have much more exposure to government companies).

These are just 3 group of government companies. There are many other listed and unlisted companies that have taken loans from Indian banks and are in no position to repay those loans.

Even if a small proportion of the above debts are classified as "NPAs" by Indian banks, a significant erosion of their networth will be seen.

It's not just high interest rates, but the increasing realization that quality of loan books is continously deteriorating that has lead to derating of bank stocks and NBFC stocks like PFC and REC.

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Its debt burden stood at Rs 46,950 crore - Rs 20,185 crore worth of aircraft loans, Rs 22,165 crore working capital loans and over-dues of Rs 4,600 crore. Its cumulative loss and debt burden comes to a whopping Rs 67,270 crore.
Air India faces debt burden worth Rs 67,000 crore - Business Today - Business News

SEBs are thus debt time-bombs waiting to explode. If it explodes, it isn’t the the power sector alone that will go down in flames. The financial sector’s exposure to this sector is nearly Rs 2,00,000 crore while the accumulated losses of SEBs by the end of this fiscal (2011-12) are expected to cross Rs 1,00,000 crore.
Rs 1,00,000 cr SEB debt bomb is waiting to explode | Firstpost

The three firms had a combined borrowing of Rs 96,727 crore at the end of March, which has now risen to Rs 119,282 crore or over 23 per cent, according to a presentation made at the Parliamentary Consultative Committee on Petroleum and Natural Gas here today.
Oil companies' borrowings cross Rs 22,555 cr in first 5 months - Economic Times
 

Alchemist

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Staff member
#2
Ajay Srivastava, CEO of Dimensions Consulting, on CNBC-TV18:

We are living in a situation with high interest rates and huge fiscal deficit. Moreover, the banking system is under tremendous stress. The nationalised banks will need close to Rs 30,000-40,000 crore of capital if they have to fund India to grow at 8% in the next three years.

The book value of the banks could be zero in the next month or so if the NPLs (non-performing loans) are correctly accounted for now. You need about Rs 30,000 to 40,000 crore of capital to fund this country to grow at 8% and for stock market to grow and that is the money which the government does not have. So, we have a different set of problems altogether compared to the western economies.
Policy reforms key trigger for Nifty: Dimensions Consulting - CNBC-TV18 -
 
#3
Since banks have considerable weightage in indices, it follows that they will also be under stress.

What do you suggest as mitigation for this risk?
 

Alchemist

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#4
Freshly published:

India is a case in point. A recent report suggests that at least 17% of Indian banks' outstanding loan assets could be on the verge of default, and debt ratings for companies are deteriorating at the fastest pace since 2009. Public sector banks make up the vast majority of the banks in India and could be the worst hit, no doubt the result of loans to politically connected borrowers. The bad loans of the State Bank of India, the nation's largest lender, are a case in point. They rose 77% in the first three months of 2011, while the bank's net income fell 99%.
Bad debt issues are becoming severe in emerging markets too and could hurt the global financial system - Moneylife Personal Finance site and magazine

Banks are the most leveraged businesses.

Indian banks have a debt:equity ratio of 8:1 to 10:1

If 17% of the loans actually turn into the NPAs, the entire banking sector would be wiped out.
 

Alchemist

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Staff member
#6
Since banks have considerable weightage in indices, it follows that they will also be under stress.

What do you suggest as mitigation for this risk?
There isn't much that an investor can do, except restricting his exposure to financial sector stocks, especially PSU stocks.

India's public debt problems are serious too, but the bubble won't burst till there is growth in the economy.

The debt problems of government companies are still not serious enough to force the government to print money.

Most probably, this time the central government will divide the losses between the lenders, state governments and itself.

PSU banks and other PSU companies will be asked to partially write-off these loans.

Right now, it isn't possible to predict how much of the losses will have to be absorbed by the PSU banks/companies, but the losses will surely do significant damage to the balance sheets of these banks/companies.
 

Alchemist

Administrator
Staff member
#7
A few years from now, SCI may also get added to the list of PSUs needing a bailout.

"SCI, which has had a profitable run for the last 19 years, is on the brink of a financial collapse... The company will be in the red from this year onward. The large and high cost orders are leading to a debt-trap almost on the lines of Air India," the document said.
SCI tanks 10 pc on bourses; stock hits 52-week low - The Economic Times

SCI is making the classical mistake that companies made in 2003-2008 economic boom - it wants to expand with borrowed money, but doesn't want to accept the fact that business conditions can worsen in future.
 

Alchemist

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#8
If loans given to other PSUs were not enough, another storm is brewing for PSU banks:

The total debt level of these ten (Adani, Essar, GMR, GVK, JSW, Jaypee Group, Lanco, Reliance ADA, Vedanta and Videocon) has jumped five times in the past five years to Rs 5.39 lakh crore (40% compounded annual growth rate, or CAGR) and now equates to 13% of the total bank loans and 98% of the net worth of the banking system," the report says.

Credit Suisse said, "Investments of most of these groups are in similar sectors and projects (primarily, power and metals) and many of them may be stressed. The asset profile of many of these groups is similar, with infra, and to a large extent, power assets driving up investments in the past few years."

There is an impending financial crisis in PSU banks, which recklessly granted loans to developers of dubious merchant power projects and questionable captive coal blocks, cleared under suspicious circumstances by ministry of environment & forests (MOEF), ministry of coal and ministry of power, says Mr Sarma.
Orchestrated scam in merchant power projects, captive coal blocks and PSU bank loans? - Moneylife

Some of the companies mentioned about are unlikely to create any problems for PSU banks.

Companies like Vedanta generate lot of cash and can afford to delay their projects by many years.

However, it's not just about the 10 companies mentioned about.

If the investment cycle in India doesn't pick up soon, PSU banks will have NPAs here, there and everywhere.

As far as I know, at current prices, share price of only 1 out of 22 listed PSU banks is above its book value - SBI.
 
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