Tag: CRISIL

Countertrend: Does India Inc. Need A Bailout?

Gone are the heady days of blowout earnings and record revenues. All that has given way to defaults, debt restructuring and distress sale. The once blue-eyed boys of corporate India are now in deep red, giving blues to investors and lenders.

Corporate credit defaults surged to the highest in a decade last fiscal with textiles, steel and construction & engineering sectors accounting for a quarter of total defaults, according to imagerating agency CRISIL. It noted that 3.4% of the companies it rates defaulted on its debts.

Rising input and interest costs coupled with slackening demand and weak pricing power have impacted corporate margins. Therefore, servicing of loans has come under stress. CRISIL adds that weak liquidity caused by elongation of working capital cycles have led to defaults. Companies like Bharati Shipyard, Kingfisher, GTL Ltd, Hindustan Construction Co, etc have managed to restructure their debt or sought approvals, thus avoiding default on their existing debts.

imageDomestic funding has been hit hard in the last 18 months, thanks to the record 13 times (175 bps) hike in repo rate since March 2010. Asset quality stress has permeated into the health of banks. Between March 31 and December 31, 2011, gross NPAs of banks rose to 2.9% of advances from 2.3% while the quantum of restructured debt spiked to 3.3% of advances from 2.5%. Higher provisioning requirements as a result of rising non-performing assets will dent the profitability of banks.

Going forward, pressure on corporates’ balance sheet is expected to ease due to lower interest rates, softening of commodity prices imageand flexibility to defer capital expenditure. But credit quality may take time to recover as interest rates are only expected to decline at a slower pace while global demand, especially in the Eurozone, looks wobbly.

Even as more companies opt for Corporate Debt Restructuring (CDR) or moratorium on loan payments, lenders can learn a lesson or two from these events. Their aggressive lending practices during the preceding boom years coupled with lack of due diligence and laxity in monitoring of loan accounts are also to blame for the deterioration in their asset quality. Banks would do well to tighten the screws from their end to insulate themselves in stressful situations.


[stockquote]KFA[/stockquote] [stockquote]CRISIL[/stockquote] [stockquote]GTL[/stockquote] [stockquote]BHARTISHIP[/stockquote] [stockquote]HCC[/stockquote]

Sunder’s List: The Economist Edition

English: World map showing the Democracy Index...

Image via Wikipedia

Picks from The Economist this weekend

Credit rating in India: the rot has just not had time to set in? (link)

It is easy to create new money but you cannot be sure where it will end up. Low interest rates in the West has led to an emerging market debt boom. (link)

The rise of the “sin tax” and a liquor store in every street corner. (link)

A match made in heaven? Italy is packed with financially precarious firms that make desirable products with glamorous brand names. Many Chinese firms have cash, but few have global brands. (link)

“Never tell a client what they own.” – Walter Schloss, RIP (link)


[stockquote]CRISIL[/stockquote] [stockquote]ICRA[/stockquote]