For banks the worst is yet to come [Shishir Asthana] 13 Feb 2014 12:25 PM By Shishir Asthana, an independent investment banker If one were under the impression that the problems faced by banks were near a bottom, there is reason to think again. There are enough data points that show we are nowhere near their lows. But first, the biggest worry of all. Nearly the entire gas-based power sector is on the verge of a closedown on account of the rise in gas price approved by the government. Even without the hike the sector was operating at a low efficiency (plant load factor) of 26% on account of non-availability. The 19,000MW units that were running on the gas that was available will now be unviable on account of the hike. Though the government is contemplating a relief package but it is mainly for the public sector electricity distribution companies. The amount of Rs6,000 crore earmarked is too small to save the sector, even those 19,000MW of plants that are operational. Nearly 30,000MW of projects at various levels of commissioning will be affected on account of the gas price hike. This amounts to around Rs2 lakh crore of investment. Assuming a debt/equity ratio of 1:3 for infrastructure power projects, the amount works out to Rs150,000 crore of bank debt. Add to this the existing Rs3 lakh crore of debt awaiting restructuring and we are talking of a 50% jump in this number. Most of these loans are given by the public sector banks. To put it in perspective, the listed public sector banks earn nearly Rs70,000 crore of profit every year. It will take them over six years to recover this money. The impact this will have on account of a trickledown effect will be even more severe and affect the smaller companies more. Apart from the power sector, which will feel the biggest single impact, there are other signs of trouble in the economy. Till date companies have defaulted on loans as economic growth has started declining. Now we have a scenario where the gross domestic product has been below 5% for at least six months as per the data available. Add to that the contraction in the manufacturing sector as shown by the Index of Industrial Production numbers and we are staring at a scenario where the manufacturing and consumption sectors of the economy have declined due to shutdowns or lower capacity utilisation. This symbolises worsening repayment capacity by corporates. With the central bank increasing interest rate at such times, the scenario has become even more difficult. What is worse that the government has clamped down on public sector spending at least till the end of this fiscal to meet the fiscal deficit target. Going forward, as election dates are announced the code of conduct will be triggered which will prevent further spending. In short, the entire business cycle or money rolling from one sector of the economy to another will be further affected going forward. Under such circumstances the brunt of the pressure will be felt by the banking sector, both public and private. sharekhan/stock-market/news/For-banks-the-worst-is-yet-to-come/f628fbee-bcd5-47ec-946e-342acf08d568/ExpertsSpeak/ExpertsSpeak.htm
Posted on: Tue, 04 Mar 2014 14:05:01 +0000
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