Fri, 20th January 2017

Anirudh Sethi Report


Archives of “Loan” Tag

Global Debt Hits 325% Of World GDP, Rises To Record $217 Trillion

While we eagerly await the next installment of the McKinsey study on global releveraging, we noticed that in the latest report from the Institute for International Finance released on Wednesday, total debt as of Q3 2016 once again rose sharply, increasing by $11 trillion in the first 9 months of the year, hitting a new all time high of $217 trillion. As a result, late in 2016, global debt levels are now roughly 325% of the world’s gross domestic product.

In terms of composition, emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. And, as has traditionally been the case, China accounted for the lion’s share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.

Joining other prominent warnings, the IIF warned that higher borrowing costs in the wake of the U.S. presidential election and other stresses, including “an environment of subdued growth and still-weak corporate profitability, a stronger (U.S. dollar), rising sovereign bond yields, higher hedging costs, and deterioration in corporate creditworthiness” presented challenges for borrowers.

Additionally, “a shift toward more protectionist policies could also weigh on global financial flows, adding to these vulnerabilities,” the IIF warned.

“Moreover, given the importance of the City of London in debt issuance and derivatives (particularly for European and EM firms), ongoing uncertainties surrounding the timing and nature of the Brexit process could pose additional risks including a higher cost of borrowing and higher hedging costs.”

For now, however, record debt despite rising interest rates, remain staunchly bullish and the equity market’s only concern is just when will the Dow Jones finally crack 20,000. 

Sadly, since we don’t have access to the underlying data in the IIF report, we leave readers with a snapshot of just the global bond market courtesy of the latest JPM quarterly guide to markets. It provides a concise snapshot of the indebted state of the world.

Short-term debt relief approved by Eurogroup but tough measures loom

Eurozone finance ministers struck a deal in Brussels on Monday on short-term measures to lighten Greece’s debt burden, but the conclusion of the country’s second review of its third bailout and the participation of the International Monetary Fund have been deferred to January.

“The Eurogroup endorsed today the full set of short-term measures, including extending the repayment period and an adjustment to interest rates,” the Eurogroup said a statement.

The decision was seen to reward Greece for implementing the latest batch of reforms demanded as part of its bailout program.

The head of the European Stability Mechanism, Klaus Regling, said after the meeting that the short-term measures will start being implemented “in the next weeks.”

The measures, however, did not meet the demands of the IMF, which has demanded substantial debt relief and harsher austerity procedures in order to join the Greek program.

India : Gross NPAs of PSBs jump nearly Rs 80,000 cr in Jul-Sep

Public banks have seen nearly Rs 80,000 crore increase in gross non-performing assets (NPAs) in the three months ended September 2016. As on September 30, gross NPAs of public sector banks rose to Rs 6,30,323 crore as against Rs 5,50,346 crore by June end.

This works out to an increase of Rs 79,977 crore on quarter on quarter basis. “The government has taken sector-specific measures (infrastructure, power, road textiles, steel etc) where incidence of NPA is high,” Minister of State for Finance Santosh Kumar Gangwar said in a written reply to the Rajya Sabha.

He listed measures like enactment of the Insolvency and Bankruptcy Code (IBC) and amendment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) and the Recovery of Debt due to Banks and Financial Institutions (RDDBFI) Act aimed at improving resolution or recovery of bank loans.

Besides, he said, RBI has come out with a number of tools such as corporate debt restructuring, formation of Joint Lenders’ Forum, strategic debt restructuring scheme and sustainable structuring of stressed assets to fight NPAs.

In another reply, Gangwar said that out of Rs 2.80 lakh crore loans to the iron and steel sector at the end of June, Rs 1.24 lakh crore has gone bad, which works out to 44.54 per cent. Replying to another question, Gangwar said no corporate loan waiver has been done by the government.

India : Over 8,100 wilful defaulters owe Rs76,685 crore to banks, Lok Sabha told

Public sector banks (PSBs) have reported 16% rise in number of wilful defaulters at 8,167 who collectively owe them Rs76,685 crore at the end of March 2016.

As against the previous year, there is 16% rise in wilful defaulters owing over Rs25 lakh each to 8,167 from 7,031 at the end of March 2015. However, dues to the bank have increased to 28.5% to Rs76,685 crore in 2015-16 from the earlier Rs59,656 crore.

To recover loans from such defaulters, banks have filed 1,724 FIRs with a total outstanding of Rs21,509 crore in 2015-16. The conviction rate in all these cases was only 1.14%.

Last fiscal, banks recovery efforts in such cases yielded Rs3,498 crore. There were 129 wilful defaulters who borrowed loans in excess of Rs100 crore amounting to Rs28,525 crore from PSBs as on 30 June 2016, minister of state for finance Santosh Kumar Gangwar told the Lok Sabha in a written reply.

To bring down NPAs, he said, RBI has formulated guidelines for early recognition of financial distress for recovery from borrowers. “Before a loan account turns NPA, banks are required to identify stress in the account under three sub-categories of Special Mention Account (SMA),” he said.

India : 1 out of every 3 rupees of corporate loans unsustainable under S4A

Graphic: Paras Jain/Mint

About one out of every three rupees lent to industry over the past five years would have been classified as unsustainable under the central bank’s sustainable structuring of stressed assets, or S4A norms, according to aMint analysis.

Under S4A, banks are allowed to split a stressed firm’s debt into the two parts—sustainable and unsustainable. Sustainable debt (which has to be at least 50% of total funded exposure) is defined as that portion of debt that can be serviced by the company’s immediate cash flows. In other words, if a company had only this portion of debt, its interest coverage ratio (ICR) would be one, or its earnings from core operations would equal interest payments. Anything above this level of debt is unsustainable.

Chinese Banks Will Need $1.7 Trillion To Cover Bad Debt Deluge, S&P Calculates

Just last week we noted that in the latest shocker to emerge out of corporate China, at least a quarter of Chinese companies were unable to generate enough cash to cover their interest expense: as we noted previously this is the Ponzi Finance stage of China’s debt curve, the one that comes just before the inevitable “Minsky Moment” at which point all bets are off.

The implications of this, for the nation with nearly $20 trillion in corporate debt as well as a grand total of 300% in debt to GDP are staggering: it means that sooner or later, up to a quarter of bank loan exposure will have to be discharged, restructured, equitized or otherwise eliminated due to its non-performing nature, dramatically impacting not just the asset side of the bank ledger, but the liabilities as well, namely deposits, which could see a drop in the trillion.

Overnight, in a report published by S&P Global, the rating agency’s analysts noticed not only the latest deterioration in corporate China, but also the relentlessly growing leverage, noting that rising debt levels will worsen the credit profiles of China’s top 200 companies, requiring the country’s banks to raise $1.7 trillion in capital to cover a likely surge in bad loans. Read More 

India bad loans mountain grows, risks delaying bank clean-up

Stressed loans in India’s banking sector crossed $138 billion in June, central bank data reviewed by Reuters shows, an increase of nearly 15 percent in just six months that suggests a state clean-up effort will take longer and cost more than expected.

Fixing the mountain of bad debt weighing down India’s banks is vital for Prime Minister Narendra Modi’s government to revive weak credit and investment growth and put a faltering recovery in Asia’s third largest economy on a firmer footing.

India’s central bank has set a March deadline for banks to fully reveal problem loans on their books. When lenders disclose bad loans, they need to take writedowns that hit their bottom line and eat into equity.

The latest data obtained by Reuters through a right-to-information request showed stressed loans rose to 9.22 trillion rupees ($138.5 billion) as at end-June, from 8.06 trillion rupees ($121 billion) in December.

The end-December $121 billion figure has been cited by the government and bankers as the peak of stressed assets in the banking sector.

Stressed assets include both non-performing loans (NPLs) – defined as those that have not been serviced for 90 or more days – and restructured or rolled over loans, where banks have eased interest rates or the repayment period.

India : Mortgage loans may see default

The loan against property (LAP) portfolio is getting hazardous for financiers as delinquencies could significantly rise in the next four quarters and may even exceed five per cent on a static basis for a few players, says India Ratings and Research (Ind-Ra).

A combination of stagnant property prices especially in metros and large cities, which are the primary markets for large and medium ticket LAP, and squeeze on refinancing due to risk aversion building up in some financiers, is bringing stress to the fore.

This is further worsened by financiers acce-pting non-residential properties as collaterals in order to expand their business in the highly competitive environment. It could go as high as 30 per cent of the portfolio for some players. While loan-to-value percentage is lower for non-residential properties, realisation on liquidation is also lower for these properties.

Ind-Ra’s study on the recovery of SME loans pool acquired by asset reconstruction companies (ARCs) through non-residential collaterals indicates a poor recovery at 25 per cent of principal outstanding.

The Micro Small and Medium Enterprises sector remains stressed and cash flows remain tight, impacting the repayment capacity.

According to Ind-Ra’s study of a sample size of over 1,000 MSMEs with debt of below Rs 10 crore indicates that the revenue growth of small businesses declined to single digits in FY15 while the propo-rtion of companies with interest coverage ratio below 1x increased 2x in FY11-FY15 and stood at 35 per cent in FY15.

RED ALERT – China Shocker: A Quarter Of All Companies Can’t Pay The Interest On Their Debt

Almost exactly one year ago, we reported that as a result of the commodity crash of 2015, more than half of Chinese companies in the commodity sector did not generate enough cash flow to pay the interest on their debt. Months later this has manifested in a countrywide push for debt-for-equity exchanges, and outright bankruptcies including the first ever liquidation of a Chinese state-owned enterprise.

While dramatic, the question remained: what about other Chinese companies not directly involved in the commodity space? We now know the answer: according to Reuters, profits at roughly a quarter of all Chinese companies were too low in the first half of this year to cover their debt servicing obligations, i.e., merely the mandatory interest payment let along debt maturities, as earnings languish and loan burdens increase. Read More 

SBI to price first offshore “coco” bond

State Bank of India is expected to price the country’s first offshore “coco”, or contingent convertible, bond today in a test of international appetite for the country’s banks as they work through a mountain of bad loans.

The deal will also be a test of the growing divide between the cost of capital for Asian and European banks, with Asian banks recently borrowing at record low costs via the bonds, which are known as Additional Tier 1 capital in Basel regulatory terms

SBI’s bonds allow for their value to be temporarily written down if the bank’s capital breaches pre-agreed levels. They can also be written off permanently if India’s central bank deems that the bank would become unviable without either an injection of public funds or the cash from the bonds.

Asia’s AT1 market is in its infancy compared with Europe, where tougher regulatory standards are seen as increasing the risk of the bonds and thus their costs. In August, Standard Chartered sold $2bn of the bonds with a coupon of 7.5 per cent.

Banks leading SBI’s deal are offering its $1bn in dollar-denominated paper with a coupon of about 5.5 per cent.

While far above the record low 3.6 per cent achieved by Singapore’s DBS last month, a deal pricing at those levels would potentially open a funding route for SBI’s competitors and provide a benchmark to price against.

India’s banks – particularly the state-controlled lenders that account for three quarters of banking assets – have been hit hard by a wave of distress in loans to corporate sectors such as infrastructure, power and steel. SBI alone made Rs214bn ($3.2bn) of provisions for troubled assets in the first six months of this year.

India’s government is pursuing a plan to inject Rs700bn into the state-controlled banks over the three years to April 2019, when they will be required to comply with Basel III capital standards.