Around Rs 10.52-trn corporate debt may default over 3 years: India Ratings

At least Rs 10.52 trillion worth of corporate loans — around 16 per cent of the system-level corporate debt — is probably going to default over subsequent three years due to prolonged slowdown in the economy. Further, around 25 per cent of the vulnerable debt is probably going to show delinquent, leading to additional Rs 2.54 trillion of delinquent debt, consistent with a recent report by India Ratings & Research. This is likely to end in incremental delinquencies to the extent of 4 per cent of the system-level corporate debt, the report adds.

A loan becomes delinquent when a borrower makes payments late (even by one day) or misses a daily installment payment(s).

India Ratings has taken under consideration top 500 debt-heavy private-sector issuers for the study after assessing their asset quality. The report buckets issuers in five categories of vulnerability — low, moderate, high, extreme and stressed.

The report details the base, bull and bear case estimates for system-wide credit costs based on the historical default rates and loss, given default for each vulnerability bucket. Credit costs on the corporate book are likely to amount to 2.15 per cent of the system debt in the base case.

"Of the businesses which are already stressed (that is, recognized as defaulters by banks and credit rating agencies), lenders to a minimum of half these companies are likely to be required to take deep haircuts, given the inherently weak asset quality of these issuers," said Arindam Som, analyst at the ratings company.

However, just in case the expansion in real gross domestic product (GDP) sees a pointy recovery (around 7 per cent over FY21-FY22), delinquencies might be lower by 87 basis points (bps) to 3.13 per cent of the system debt. But, if the slowdown accelerates, to say 4.5 per cent over FY21-FY22, delinquencies could be higher by an additional 159 bps to 5.59 per cent of the system debt, the report added.

India's gross domestic product (GDP) growth slipped to nearly a 7-year-low of 4.7 per cent in the December quarter, owing to contraction in investment and manufacturing output. Looking ahead, GDP growth is about to stagnate at 4.7 per cent within the March quarter (Q4), too, consistent with the annual estimate by the National Statistical Office (NSO), which has forecast 5 per cent growth for full fiscal year .