6 reasons why RBI should take note of UBS report on Indian banks-Business Standard-11.07.2015
UBS has surveyed exposure of 100 companies constituting around 15% of corporate loan book and found that nearly 60 per cent of the companies have a debt to equity ratio of greater than five. Around 10 per cent of these companies have a debt to equity ratio of less than 2, the level which is considered prudent. Furthermore, around 50 per cent of these companies have cash interest coverage of less than one, implying that they are not even generating enough to service the debt.
Yes Bank has the highest credit exposure to these companies at 8.9 per cent followed by PNB at 8.2 per cent and ICICI at 5.5 per cent. For Yes Bank, these exposures accounts for 19 per cent of loans while they are 14 per cent for ICICI and 10 per cent for PNB. Yes Bank has contested these numbers.
The report points out that many banks continued to fund these companies despite the stress. Yes Bank increased its loan by a whopping 309 per cent followed by 103 per cent by ICICI Bank and 97 per cent by HDFC Bank. Loan approvals as a percentage of the networth were 125 per cent for Yes Bank; 100 per cent for PNB and 67 per cent for ICICI Bank. Yes Bank says that they have not added new risks to the book.
What can make the loans toxic is the poor level of collateral against them. Only 37.9 per cent of loans are covered by immovable property while 25.3 per cent are covered by movable and immovable assets and only in 51.6 per cent of the case does the bank have a first charge over the asset.
The report says that immovable assets backed loans are the highest for public sector banks with BOB accounting for 43 per cent, followed by PNB at 36 per cent and SBI at 35 per cent. Among the private sector players, Axis at 35 per cent and ICICI Bank at 31 per cent are relatively better covered.
Quality of loan becomes weak if banks have a subservient or subordinate charge on the asset. Yes Bank, the report points out has the highest level of subservient charge at 21 per cent followed by IndusInd Bank at 17 per cent and ICICI Bank at 11 per cent.