HYDERABAD: Corporate loans worth as much as Rs 10.52 lakh crore, or 16 per cent of the system-level corporate debt, is likely to default over the next three years if the prevailing economic slowdown intensify further, according to India Ratings and Research.
Of this, around 25 per cent of the vulnerable debt is likely to turn delinquent, resulting in additional Rs 2.54 lakh crore of delinquent debt. This is likely to result in incremental delinquencies to the extent of 4 per cent of the system-level corporate debt, the ratings firm added.
"Of the companies, which are already stressed (that is, recognised as defaulters by banks and credit rating agencies), lenders to at least half of these companies are likely to be required to take deep haircuts, given the inherently weak asset quality of these issuers," said Arindam Som, analyst, India Ratings.
The conclusions are based on a study assessing the asset quality of 500 debt-heavy private sector accounts that are categorized into five buckets of vulnerability - low, moderate, high, extreme and stressed. The report details the base, bull and bear case estimates for system-wide credit based on the historical default rates and loss, given default for each vulnerability bucket. Credit costs on the corporate book are likely to amount to 2.15 per cent of the system debt in the base case.
However, in case India’s growth in real GDP sees a sharp recovery (about 7 per cent over FY21-22), delinquencies could be lower by 87 bps to 3.13 per cent of the system debt. But if slowdown accelerates to say 4.5 per cent over FY21-22, delinquencies could be higher by an additional 159 bps to 5.59 per cent of the system debt, it added.
It may be noted that India’s GDP plunged to a 7-year-low of 4.7 per cent in the third quarter this fiscal, largely due to weak investment, manufacturing output and reduced government expenditure. Going by the FY20 estimates, growth will likely print at 5 per cent, which means growth may stagnate at 4.7 per cent in March quarter. However, the government said signs of recovery were visible and that growth for the full fiscal is expected to pick up to 6-6.5 per cent in FY21.
16 per cent of the system level debt is likely to default
2.15 per cent will be the credit cost on the corporate book
Growth Scenario
If India’s growth in real GDP sees a sharp recovery (7 per cent over FY21-22), delinquencies could be lower by 87 bps to 3.13 per cent