It's a double whammy - India Inc., will take a while before it breathes easy again; you can blame it on dud-loans and low capacity utilisation. Though they may appear unrelated in the first instance, it's not so - for both feed of each other.
Rating agency, CRISIL says the move by Mint Road to refer a dozen large non-performing assets (NPA) for resolution under the Insolvency and Bankruptcy Code (IBC 2016), based on the recommendations of its internal advisory committee will be a big positive for bank balance sheets. It says banks have already provisioned for 40 per cent for these NPAs worth Rs 200,000 crore; or equal to a quarter of the NPAs in the banking system before the central bank's move.
And here is the cost attached to the measure. Says Krishnan Sitaraman, Senior Director-CRISIL Ratings, "Based on CRISIL's assessment of embedded value in the top 50 NPA cases, we estimate a 60 per cent haircut would be needed on these loan assets. That would mean banks will have to increase provisioning by another 25 per cent this fiscal, compared with nine per cent in the last."
Now read this along with a CARE Rating's report on capacity utilisation (CU). A clue to investment is the CU rate in industry. Typically, companies start investing in capital once a minimum threshold of CU level is achieved, after which it becomes necessary to invest in machinery to produce more goods. Globally, it has been observed that the CU rate needs to move towards the 80 per cent mark for fresh investment to be invoked although extremely buoyant conditions in demand would hasten the pace. The relatively low and declining CU is one of the reasons that the investment rate in the country has been falling in the last couple of years with the CU rate remaining fairly static in the region of 71-73 per cent.
Says Rucha Ranadive, Associate Economist at CARE Ratings: "It is believed that more robust demand across industries is required to push up this rate which can lead to higher investment. Doing a random simulation we conclude that industrial growth rate of around eight per cent combined with an inventories to sales ratio of closer to 15 per cent would help to move the utilisation rate towards 80 per cent when fresh investment normally is spurred".
The co-joint twins
What can be deduced is banks' will be in no position to lend as in the past because of the uptick in dud-loan provisioning; they will have to first clean up their balance-sheets. Sure the impact of this could be mitigated if banks are allowed to amortise the provisioning across 6 to 8 quarters - or two years (it will be 2019 by then!).
Then you have the headache of sectoral exposure limits - banks' need to be within these limits when they lend to industry and specific firms; it's to ensure they are not over exposed to them. Now given the NPA overhang many banks have already hit such limits and those sectors will not be able to avail of bank credit anytime soon.
Says Rama Patel, Director-CRISIL Ratings: "While the IBC route could entail a substantial markdown of loan assets by banks, the ability, especially of state-run sector banks, to absorb such losses and the consequent impact on their capital position will need to be monitored closely in the road ahead."
Where does it leave us on the CU front? Many firms are low on it because they are NPAs on bank books and are not eligible for fresh round of debt restructuring. Or banks are just not able to vend loans liberally as they have capital woes to attend to.
Bottomline - grin and bear it!