The bad loan crisis is one of the biggest pain points in the Indian economy today. We take a look at the RBI’s latest Financial Stability Report to identify which stressed sectors contribute most to the NPA problem.
In short, the pain is mainly concentrated in the Iron and Steel sector. The fall in commodity prices and overcapacity in the sector has compounded the problems for this industry. We can see the magnitude of the pain in the chart below:
Here the Iron and Steel industry’s interest expense is much more than the earnings of companies in the sector. With excess supply from China and a slowing global economy, it seems unlikely that this sector will turn around any time soon.
Other industries that are highly leveraged include construction, power, telecommunication and transport.
More broadly we see that most major sectors continue to show an increase in non-performing assets and stressed advances continue to rise. From the chart above we also see that the pain in mostly in the industrial sector. The only exception here is retail loans where the risk of default and stress in the sector continues to be low and has in fact fallen between March 2012 and March 2016.
Breaking down industry into sub-sectors, we see that basic metal and metal products account for the highest stressed advance ratios as of March 2016. This confirms Chart 1.21 above in telling us that the bulk of the pain is in the Iron and Steel sector. Construction, cement and the textile sectors have also shown high stressed advance ratios.
It is notable that a number of sectors have seen an improvement in their stressed advance ratio, with the infrastructure sector seeing the most improvement. The stressed advance ratio in infrastructure fell from 21.8 per cent in September of 2015 to 16.8 per cent in March 2016. This is a positive sign and shows that the initiatives taken by the government to boost infrastructure are beginning to take effect and points to a slow turnaround in this sub-sector.
Rishad is the founder of Kairos Capital. He started his career with Standard Chartered Wealth Management and has extensive experience in markets, particularly in terms of mutual funds and stocks.