Indian banks most vulnerable … their capital will be wiped out under stress scenario: Moody’s

On Monday, Yes Bank stock fell 15 per cent, State Bank of India 3.7 per cent, ICICI Bank 3.5 per cent, Axis Bank 2.3 per cent, and HDFC Bank 1.4 per cent.

According to a recent Crisil report, PSBs — which make up for roughly 80 per cent of the bad loans in the banking system — will see their gross NPAs shrinking by as much as 400 bps to 10.6 per cent by March 2020 from 14.6 per cent in March 2018. Separately, the government recently told Parliament that gross NPAs of state-run banks dropped to Rs 8,06,412 crore as of March 2019 from the peak of Rs 8,95,601 crore a year earlier, highlighting the improvement in PSBs’ asset quality.

While the ratio of corporate debt to GDP is relatively lower in India and Indonesia, the distribution of debt is skewed toward highly leveraged corporate borrowers with low interest coverage ratios, and this has resulted in high loan default rates that have plagued Indian banks since 2011, according to Moody’s.

“Our stress test — which assumes a 25 per cent decline in EBITDA (earnings before interest, tax, depreciation and amortization) — shows banks in India and Indonesia are most prone to a deterioration in corporate debt repayment capacity …,” wrote Rebaca Tan, assistant vice-president and analyst at the Moody’s Investors Service. India and Indonesia will have the largest share of debt owed by corporates with debt/EBITDA ratios of more than 4 and interest coverage ratios (ICRs) of less than 1, as well as those with negative EBITDA. —FE