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November 13, 2012 6:24 pm
On a Friday evening in late spring, representatives of Standard Chartered, the biggest international bank in India, headed for London’s Heathrow. The agents were not bankers en route to Asia. Instead, they went to the airport to seize two Kingfisher passenger jets as collateral, amid mounting worries about the airline’s deteriorating finances and the prospect that StanChart’s outstanding loans would not be repaid.
With the aircraft held hostage, Kingfisher repaid its debt and StanChart returned the jets.
The Kingfisher affair is just one of many headaches for banks in corporate India. The total debt of the 10 largest corporate borrowers has increased fivefold in the past five years, according to research from Credit Suisse.
The biggest corporate borrowers are suffering from sluggish operating performance, rising interest costs and declining interest coverage. Yet few debts so far are classified technically as non-performing.
Crisil, the local credit rating agency, expects restructured loans will jump to Rs3.25tn ($59bn) in March 2013 compared with Rs2tn in March 2011.
StanChart is suffering more than most. Its non-performing loans in India amount to 10 per cent of its total portfolio at the end of June, double the number it reported at the end of last year and much worse than many rivals. By contrast, Citigroup’s problem debts are running at only 1 per cent of its Indian balance sheet.
Many of StanChart’s big borrowers include units of groups such as Adani Enterprises, DLF, Essar, GLT, GVK, and Anil Ambani’s Reliance Group.
Several of these groups have very high levels of debt. For example, Adani has increased its debt from Rs44bn to almost Rs700bn in the past five years and its debt to its earnings before interest, tax, depreciation and amortisation is almost 14 times. Essar’s debt has ballooned to Rs938bn from Rs246bn in the same period and its interest coverage stands at a mere 0.6 per cent.
Many of these companies have valuable assets. But they are not producing sufficient cash flow to repay loans and asset sales are difficult as buyers wait for prices to fall further.
It is difficult to know the full extent of StanChart’s exposure to these big borrowers, with some exposure syndicated to other banks. In many cases, though, the lender has taken collateral in the form of company shares, which have lost much of their value in recent months, according to people familiar with the matter.
StanChart declined to comment.
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