'Risky' firms may need Rs 1 trillion refinancing by Mar '15

Half of about Rs 2 trillion worth of loans up for refinancing in the next 12-15 months by India's top firms belong to companies that are either already in financial distress or can be deemed as carrying 'elevated refinancing risk'.

That is the conclusion of a study done by India Ratings & Research (Ind-Ra), a Fitch subsidiary.

According to Ind-Ra's report, bank loans worth Rs 1.9 trillion to Rs 2.1 trillion belonging to the country's top-100 corporates are due for refinancing by the end FY15.

The firm made this projection after analyzing these firms' expected metrics such as operating cash flows, working capital requirements, finance cost, etc, for the next few years.

Of the 74 companies (out of 100) that are expected to face a refinancing requirement, 12 (requiring 27 percent of the total capital) have been classified by the firm as having "high ease of refinancing", 22 (needing 23 percent of the amount) have been rated as having "moderate ease of refinancing".

But as many as 20 companies (26 percent of refinance requirement) are classified as having "elevated refinancing risk" while another 20 (24 percent) have had their debts restructured after a default, according to the study.

"While refinancing is a common phenomenon, the roughly Rs 1 trillion of refinancing loans required belong to corporates whose credit profile has weakened over a period of time," said Deep Mukherjee, Director, India Ratings. "The amount represents about 13 percent of the Indian banking system's net-worth."

Banks, as a result, would face a "tremendous challenge", he said, trying to decide the cost at which they would refinance loans to such corporates.

This would result in banks having to either continue extending credit in the face of weak fundamentals, or hold back credit and triggering a liquidity crisis for corporates.

Ind-Ra had flagged a similar concentration risk in the Indian banking system in a 2011 report. "[But] at least some of these corporates have experienced significant erosion in their balance sheet strength since 2011," the new report says.

There are no surprises in terms of which sectors look the most susceptible, Mukherjee said. "The sectors requiring the highest amount of refinancing are construction and infrastructure followed by steel and airlines," he said. "The challenge is a lot of them have very negligible cash flows to the extent if the risk is priced in while refinancing the loan, their interest coverage would further weaken."

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