weaker corporate balance sheet and its implication

WEAKER CORPORATE BALANCE

SHEETS IN INDIA AND IT’S IMPLICATIONS ON BANK

PREPARED BY :

APURV RASTOGI (15)

ANKIT BOUNTIYAL (24)

MOHIT KUMAR (57)

DEVYANI SINHA (37)

TARU SRIVASTAVA (50)4/22/2017 Bhavan’s Usha and Lakshmi Mittal Institute

of Management 1

CONTENTS

• Economic Development- Role of Bank Credit .

• Credit Growth And It’s Importance.

• Non- Performing / Productive assets.

• Tracking NPA’S.

• Current status of NPA’S.

• Restructured Portfolio.

• Risk To Banking Sector.

• Twin Balance-Sheet.

• Data Till Date.

• Reasons.

• Indian Characteristics .

• Relaxation To Indian Corporates.

• Implications.

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ECONOMIC DEVELOPEMENT – ROLE OF

BANK CREDIT

• The growth of the banking industry is closely linked with the growth

of the overall economy.

• This will be backed by the stellar growth in infrastructure, industry,

services and agriculture

• The year-wise growth rates of GDP of the country and Banks’ credit

are furnished in Table



Table - 1GDP Vs. Credit Growth (%)

Year GDP Credit

2004-057.0 30.9

2005-069.5 30.8

2006-079.6 28.1

2007-089.3 22.3

2008-096.7 17.5

2009-108.4 16.9

2010-118.4 21.5

2011-126.5 17.0

2012-134.8 15.1

CREDIT - GROWTH

• The strong credit growth is the synonymous with

improvement in asset quality.

• The declining credit growth in the system is an

indication for asset deterioration and likely to

add impaired assets further


NON-PERFORMING ASSETS (NPA)

• An asset is classified as Non Performing Assets (NPA), if due in the

form of principal and interest are not paid by the borrower for a

period of 90 days.

• then the bank will have to treat all the credit facilities granted to that

borrower as non-performing without having any regard to the fact

that there may still exists certain credit facilities having performing

status.

• High level of NPAs not only affects core performance area of the

banking system but also raises corporate governance issues

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Table 2 - Evolution of NPAs

YearGross

NPA (%)Net

NPA (%)

2006-072.5 1.0

2007-082.3 1.0

2008-092.3 1.1

2009-102.4 1.1

2010-112.4 1.0

2011-122.9 1.3

2012-133.4 1.4

Source: RBI Reports

TRACKING NPA’S

• Non- performing or non productive assets is a loan or advance for

which the principal or interest payment remained overdue for a

period of 90 days.


CURRENT STATUS OF NPA’S

• The Gross NPA ratio of the banks has witnessed sharp increase

from 2.90% as on 31st March 2012 to 3.40% as at end of March

2013.

• Similarly, the Net NPA ratio has gone up from 1.30% to 1.40%

during the same period.



Table 3 - Sectoral NPA as on 31st March 2013

No Sector Percent

1 Agriculture 4.7

2 Construction 4.0

3 Cement 2.7

4 Infrastructure 1.5

5 Iron & Steel 4.0

6 Engineering 3.7

7 Automobile 1.8

Source: Financial Stability Report June`13

RESTRUCTURED PORTFOLIO

• To support the ailing sectors, banks are undertaking restructuring of

advances through relief measures.

• Reduction of interest rate, extension of repayment schedule etc., to

make them viable and bring back to normalcy.

• Restructuring would normally involve modification of sanction terms,

which would generally include alteration of repayment

period/installment/rate of interest/sacrifice



Table 4 – Restructured Advances of all SCBs

YearAmount

(` lakh crore)

% Restructured standard advancesto Gross advances

2009 0.75 2.73

2010 1.36 4.23

2011 1.38 3.45

2012 2.18 4.68

2013 3.58 5.70

Source: Economic Times dated 31.10.12 & Financial Stability Report June`13

RISK TO BANKING SECTOR

• Risks to India's banking sector have risen in the last 3 years, given a deterioration in asset quality and lack lustre corporate profit growth, therefore leading to a problem of twin balance –sheet aka balance sheet syndrome .

• It is likely to mean that an increase in the level of bad loans held particularly by state-run banks over the next year, even under the "normal" circumstances considered in the report, as debt owed by India's largest borrowers sours i.e., corporates further.

• About 85 corporates holding Rs4 trillion worth of debt are highly unlikely to recover in the short term as they not only sit on a massive pile of debt that they cannot service but also have a large number of non-productive assets


TWIN BALANCE – SHEET EFFECT

• Balance sheets of both public sector banks (PSBs) and some corporate houses are in terrible shape and it has been seen as a major obstacle to investment and reviving growth. The problems faced by the Public Sector Banks are linked directly to that of the corporate sector.

• During the boom years, some companies borrowed a lot of money from banks to invest in infrastructure and commodity- related businesses, such as steel, power, infrastructure etc. But now, due to slump in both these sectors, the corporate profits have hit lows.

• To put it in other way public sector banks are burdened with the high non-performing assets (NPAs) while some of the corporate houses are also under stress due to sluggish global demand. This has been named as the Twin Balance Sheet Syndrome.


DATA TILL DATE

• Given the debt binge, two out of every 10 firms are now in deep

trouble and require several years to clear the debt .

• A study of balance sheets shows that the top 500 corporate

borrowers sit on a debt pile of Rs30.2 trillion and hold assets worth

Rs57.2 trillion.


REASONS

• Weak profitability and high burden of debt for the private sector as weak profitability and over-indebtedness discourages investment by corporate in India.

• Stalled projects and inadequate bankruptcy procedures. Failed PPP models have contributed to losses of the private sector.

• Many PSBs have financed several infrastructure projects and stalled infrastructure projects have resulted in large volume of stressed assets in banks.

• The PSBs are now not ready to give loans to the business sector fearing penal action for managers in the context of rising NPAs. It further stalls projects by the corporate.


REASONS

• During FY 2015-16 Companies balance - sheets were weak mainly due to depressed demands and the US Federal Reserve interest rate hike and China's slowdown.

• During FY 16-17 the demonetization of high-value notes has hit demand across the economy and analysts expect at least two quarters to go until conditions normalize. These companies will soon find themselves in a tough spot.

• One of the main reasons is the increase in the percent of NPA’S i.e. non performing/productive assets.

• Five sectors - mining, iron and steel, textiles, infrastructure and aviation - accounted for 24.2 percent of advances from India's banks, but 53 percent of stressed debt, the report said.


INDIAN -CHARACTERSTICS

• What distinguished India from other countries was the consequence of TBS. Even as Indian balance sheets have suffered structural damage on the order of what has occurred in crisis cases, the impact on growth has been quite modest. TBS did not lead to economic stagnation, as occurred in the U.S. and Europe.

• Reason was , the strategy , as the saying goes, to “give time to time”, meaning to allow time for the corporate wounds to heal.

• That is, companies sought financial accommodation from their creditors, asking for principal payments to be postponed, on the grounds that if the projects were given sufficient time they would eventually prove viable.

• Initially , this request seemed reasonable. For a start, the “giving time to time” strategy had worked well in the previous business cycle, during the early 2000s.


WHY CORPORATES ARE GIVEN LAX

IN POLICIES ?

• The company financials of the 10 most severely debt-stressed

corporate groups over the past three years, namely Lanco, Jaypee,

GMR, Videocon, GVK, Essar, Adani, Reliance ADAG, JSW and

Vedanta.

• The picture that emerges is one of a toxic nexus of unscrupulous

businessmen, negligent and corrupt bankers, complicit auditors .

• The penal provisions of the Insolvency and Bankruptcy Code

introduced need to be further strengthened in that direction.

• The focus of legislative changes should be on dismantling the edifice of

parasitic, crony capitalism rather than on enhancing the supposed ‘ease’ of doing business.


IMPLICATIONS ON BANKS

• Banks fail to make profit cause of poor NPA’S and cannot serve interest to depositors and meet their expenses. Ultimately are incurring losses and their are bank failures.

• A Lehmann Bro’s like situation would be seen soon.

• Low rate of interest on deposits i.e. on saving accounts.

• Bad bank loans undermine India’s growth hopes.

• Due to low rate of interest on savings and deposits , depositors will withdrew money from banks thereby creating a shortage of money supply and funds flow end result would be inflation which will paralyze the economic growth.

4/22/2017EEP PRESENTATION,PGDM BATCH

16-1820

CURRENT PLETHORA

• Although, the current scene is that the GNPA’S & NPA’S are

improving but they still need a very strict monitoring.

• Improved NPA’S and balance sheets were the result of strong

actions taken by current government and ex RBI governor Raghu

Ram Rajan.

• Creation of ARC’S I.E ASSET MANAGEMENT COMPANIES helped

in improving the aforesaid situation.

• In addition the option of RETAIL LENDING as exercised by majority

banks proved a life jacket against the souring NPA’S and balance

sheets.

• various amendments in indian laws such as Indian Solvency And

Bankruptcy code etc proved a medicine against a syndrome.


THANK YOU


weaker corporate balance sheet and its implication

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