Banks in India are secondmost vulnerable in APAC: Moody’s

MUMBAI: Large loans given to businesses with poor repayment capacity have raised Indian banks’ exposure to risks, which are now second only to China in the Asia Pacific (APAC) region, Moody’s Investors Service said.

Even as overall credit penetration in India remains low, exposure to risky corporate borrowers has increased the risks of defaults, the agency said in a report on Wednesday.

Although private sector credit as a percentage of GDP for India is the third lowest in the region, a considerable portion of it is owed by businesses with weak debt servicing ability. Private sector credit includes debt owed by households and private non-financial sector. “Systems like China, India, Indonesia and Singapore report high concentration of corporate leverage among borrowers with low debt servicing capability,” Moody’s said.

Debt servicing ability has been assessed based on the interest coverage ratio (ICR) of a firm where a number below 1 means earnings are insufficient to cover the interest payments. Of the overall corporate debt owed by firms in India, over 15% is owed by firms with ICR less than 1. “In India, we observe that the high share of debt owed by weak corporates is explained by a relatively small number of very large borrowers,” the report said.

The report based on the study of 14 markets within APAC shows that while debt accumulation has slowed across the region, overall leverage remains high.