'Risky' firms need refinance of Rs 1 lakh crore by FY '15

Bank loans worth around Rs 2 lakh crore belonging to India's top firms are due for refinancing in the next 12-15 months and 50 per cent of this -- equivalent to 13 per cent of the banking system net worth as of FY13 -- may present a significant underwriting challenge to bankers under the prevailing macroeconomic situation, said a study by India Ratings & Research (Ind-Ra).

The study implies that these top companies are already in financial distress or can be deemed as carrying ‘elevated refinancing risk’.

As per the report, bank loans worth Rs 1.9 lakh crore to Rs 2.1 lakh crore belonging to the country’s top-100 corporates are due for refinancing by end of fiscal 2015. This projection was made after Ind-Ra analyzed these firms’ expected metrics such as operating cash flows, working capital requirements, finance cost, etc, for the next few years. 

Of the 74 companies (out of 100) that are expected to face a refinancing requirement, 12 (requiring 27 per cent of the total capital) have been classified by the firm as having “high ease of refinancing,” 22 (needing 23 per cent of the amount) have been rated as having “moderate ease of refinancing”.

But as many as 20 companies (26 per cent of refinance requirement) are classified as having “elevated refinancing risk” while another 20 (24 per cent) have had their debts restructured after a default, according to the study.

“While refinancing is a common phenomenon, the roughly Rs 1 lakh crore of refinancing loans required belong to corporates whose credit profile has weakened over a period of time,” said Deep Mukherjee, Director, India Ratings. “The amount represents about 13 percent of the Indian banking system’s net-worth.”

As a results, banks would face a “tremendous challenge”, he said, trying to decide the cost at which they would refinance loans to such corporates.  It would result in banks having to either continue extending credit in the face of weak fundamentals, or hold back credit and triggering a liquidity crisis. 

Ind-Ra had flagged a similar concentration risk in Indian banking system in a 2011 report. “[But] at least some of these corporates have experienced significant erosion in their balance sheet strength since 2011,” the report said.

There are no surprises in terms of sectors that are most susceptible, Mukherjee said. “The sectors requiring the highest amount of refinancing are construction and infrastructure followed by steel and airlines,” he said. 

“The challenge is a lot of them have very negligible cash flows to the extent if the risk is priced in while refinancing the loan, their interest coverage would further weaken.”