India is looking at a larger credit crisis. (Representational Image) | Photo: Dhiraj Singh | Bloomberg
Representational image | Photo: Dhiraj Singh | Bloomberg
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Mumbai: Ashish Gupta is surprised that not a single Indian billionaire sued him in the last decade.

His 2012 “House of Debt” report for Credit Suisse Group AG gave investors an early warning about the dangerous levels of delinquent borrowing by many of India’s top business groups. That helped push policy makers to review banks’ loan books and revise the nation’s official bad-loan ratio from about 3% to 9.3%, one of the highest in the world.

“The scale of mounting debt was first quantified and highlighted by the outstanding work of Ashish Gupta at Credit Suisse,” Arvind Subramanian, who advised Prime Minister Narendra Modi in the early years of the banking crisis, wrote in his 2018 book, Of Counsel: The Challenges of the Modi-Jaitley Economy. He hailed Gupta as “one of the few heroes in India’s sordid banking saga.”

The coronavirus pandemic now roiling global markets adds urgency to his warnings. Gupta, Credit Suisse’s chief of India equity research, says the crisis engulfing India’s shadow bank sector could be even more destabilizing for the $2 trillion economy because the risks are held in entities that, unlike state banks, rely on market funding and provide scant disclosure. The government-backed rescue of Yes Bank Ltd., until recently India’s fourth-largest private lender, may further reduce banks’ willingness to provide credit to the economy.

In February and March interviews in Mumbai, Gupta described his approach to analyzing Indian businesses, his outlook for the financial industry, and the risks he’s focused on today.

Q. Where did the inspiration for the first “House of Debt” report in 2012 come from?

Ashish Gupta: From 2011 we had started writing about corporate NPAs [non-performing assets]. The reason was that while India’s overall economic trajectory was good in 2011, certain segments weren’t doing too well, and they were some of the most indebted parts of the economy. We started looking at how many companies have adequate cash flows. A lot of our reports use interest cover as a barometer of financial health, and that started revealing a lot. We found that 15% of companies had interest cover less than 1 [meaning those companies’ annual cash flows weren’t sufficient to pay their annual interest expense]. We started focusing on these firms, and some concentration started manifesting.

Ashish Gupta, Credit Suisse's Managing Director and Head of Equity Research in India at his office in Mumbai on March 4, 2020. | Bloomberg
Ashish Gupta, Credit Suisse’s Managing Director and Head of Equity Research in India at his office in Mumbai on March 4, 2020. | Bloomberg

Q. Did it take some courage to come out with these reports?

AG: Because it was so controversial, all our reports are just based on public data or published historical data. In none of our reports is there a forecast. The sad truth is that—even without forecasting anything, just by looking at historic data—the situation was so stark. In 2011 was when we first came out and said NPAs in the banking system are in double digits and not the 2% that is reported. But 2012 is when we narrowed it down. I remember in 2013-14 we did another report where we showed NPA numbers had gone up. We looked at annual reports of the companies, which according to Indian regulations had to start reporting if they were in default of payments to creditors. So we aggregated some top 200 annual reports and some of the companies we were tracking. Just by adding that, we were able to come to some double-digit number on the percentage of corporates where in the annual report the company has mentioned it is in default of its debt obligations, and it was not reported by the banks. So in the banks’ book it was not an NPA. And in fact many of the companies in their reports even mentioned the amount in default, the period of default—and in many cases that was more than 90 days [the threshold for bad-loan recognition in India]. But still in the bank books everything was good. So I don’t know where the slip was.


Also read: What crisis? HDFC Bank is ramping up corporate loans while rivals are retreating


 

Q. What kind of reaction did you get?

AG: The first pushback was that these are large conglomerates, so if something happens to them they have other businesses, and their promoters have deep pockets. I said: “That is why actually we are doing a group-level analysis. We are saying at the group level there is a problem.” The second pushback was that these projects are all under construction, so you are kind of penalizing them because these are works in progress and when they are completed it will all be good. But again my response to that was simple: When you look at interest cover, you are looking at it on the P&L [profit and loss statement]. The P&L expense is only the cost of debt or operational costs. So you are comparing apples to apples: revenues generated from completed projects versus cost of debt of completed projects. There was of course pushback from the banks as well. Ironically this always happens that people will say, “Yes, the power sector has a problem, but the power projects I have financed have no problem.” And nowadays the real estate sector is the same: “Real estate is a problem, but my projects are all fine.” There was a lot of pushback also from investors. I can choose not to listen to what the bank managers are saying, but I can’t choose not to listen to the investors because they are my clients. Thankfully, as I said, we were able to get into every project level and show the data. Because there was such concentration, you had to analyze only about 15 companies and 150 projects, and then you can show the argument.

Q. Did investors appreciate what you had done?

AG: Not so much after the first one [report]. But after the second one the belief started. One thing I was surprised about is before the Indian regulators went about it, some of the international regulators sought out our work. A global bank had large exposure, so international regulators had their eye on the overseas operations of a bank. By the end of 2015, the RBI [Reserve Bank of India] started the AQR [asset quality review] process. It also sent out a message to the bank that the supervisors are not willing to look the other way or are looking more closely at it.

Q. Is there anything your team missed?

AG: IL&FS [Infrastructure Leasing & Financial Services Ltd., a non-bank financial company that was seized by the government in September 2018] was one thing that even we didn’t find out about. All our analysis was centered on drawing data on listed companies. Because IL&FS was unlisted it was never in our line of sight. But in terms of the listed space we believe a lot of the large problems are known and recognized.

Q. What are you focusing on now?

AG: For the last two years we have been highlighting the NBFC [non-bank finance company] sector issues. They have partly panned out, but the general belief is once the big event has happened, then slowly liquidity improves. But I am not seeing that in the NBFC sector. What the market has done is clearly put people into two buckets, good and bad, and the outlook for the second one is not really improving in terms of getting funding. And for financial companies it’s not really the quality of assets, because if any financial entity—be it the best bank or the biggest bank—if any financial entity does not get incremental flow, the liquidity, it will be a self-fulfilling prophecy.

Q. What about Yes Bank?

About five years ago, state-owned banks pulled back on credit on account of asset quality and capital issues. Over the past 18 months the NBFC sector has had a pullback due to their liquidity issues. Private banks were the only pocket of the financial sector that was till recently growing credit and was accounting for as much as 60% of incremental loans in the economy. However, recent events and delayed bailout of a private bank creates an unnerving precedent and uncertainty for deposit holders/debt providers to private banks. We therefore expect private banks also to turn more risk averse and conserve liquidity, particularly the small/mid-sized private sector banks. This can further aggravate the credit crunch in the economy. – Bloomberg


Also read: Moral of Yes Bank collapse story: Money makes you do things you don’t want to


 

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38 Comments Share Your Views

38 COMMENTS

  1. I have been tracking Indian Stock markets since Harsher Mehta’s time in nineties.
    Troubles comes in many ways but Indian economy has always bounced back.
    This time also it will.
    Frauds etc are a part of business which helps to develop system further.
    As long as subjectivity will remain in any system in form of human decision making objectivity will suffer and we have frauds,failures in our journey to growth.
    Let us face it.
    Strengthen our systems,fix the loop holes and move on.And mind that it is a never ending continuous process of improvement.

  2. Liquidity is when a person has adequate liquid cash to meet present and immediate future obligations. Since one of the major money movers, the Government and the public sector control money flow and corruption is open and rampant, we see good money going off records. This is a perpetual drain on the economy. When productive capacity of a nation is below average and corruption is above average, commercial efficiency will be measured through financials is always flawed. And study based on such is also the same.
    Realistically, we see retail funding of assets based on current income itself caused disruptions like LEHMAN BROTHERS.
    jobs are uncertain. Business payment commitments are never followed. Liquidity never questioned. All contribute to a terrible uncertainty of every going concern.
    Start working on a model where the real liquidity of both inward and outward obligations are reported. So that net credit on a balance sheet is on a portion of equity.
    Correction happens and recovery begins
    Else no amount of reports or warnings can arrest the tumble to disaster.

  3. If this is fixing, then I would rather have no fixing at all. No job, no food, no safety…no future…. Please govt do not fix things for me.

  4. Such type of paid interviews have 50% probability and 100% fanfare.As a senior Banker having a prized career for 12 years on the bank floor i vow that there cant be any impact in the industry and Indian banks are guarded by RBI which is far superior than all Asian HQs.We should now concentrate on Corona and then no one should worry particularly outdated NRIs as again 1.3billion population will be at work for a 3.3trolling dollar economy with a PPP 10trillion plus…Just one in time and India under RBI and Modi WILL BE BACK…JAI HIND

    • Very good comment .
      Would like to add pressure from the politicians should be avoided. Freebies also be avoided.

  5. This is all because of Congress, no worries we have a great leader (Modi).who will not just fix the problem but he will make sure this will not repeat.

  6. Yes. It’s correct manipulation and centralised control system from PM office has to be stopped. They don’t understand about economy just need funding from election then their work will done.

    • Incapable Misleaders are ruling India. They want power at any cost. Qualification of our PM is not known. What a country ours has been changed, at the hand of an unreliable man we have chosed to be ruled by.

      Arun Jaitley, Shaktikant Das, Nirmala Sitharaman….are there no experts visible to the PMO to manage the economy of the country.

      No. Fact is that this PM is either biased or is an incapable leader.

  7. Current Indian debt crisis can be boiled down to 3 main root causes: 1. irrational exuberance before 2008 financial crisis 2. excessive competition among businesses resulting in optimistic pricing leading to business failures 3. corruption

  8. Excellent article opening the eyes of Public as to how the corporates manipulate their accounts and Banks are suppressing their N.P.As. Both have joined their hands to loot hard earned Public money. The corporate white color Mafias are living luxurious life at the cost of public fund throwing their responsibilities/liabilities under the protection of fancy name ” NPA”. OR “Willful Defaulter ” . Honesty, transparency and ethical business have vanished from public life and the biggest looters are the reputed persons in the society. Only God can do some miracle to save our Country.

  9. Let see who will invest in India. The western Economies will be under rescission and no money to spare. As Modi supported Tugluk Jagan, CM of Andhra Pradesh, no one from USA/Canada would invest in India.

  10. How do you think this will have an impact on certain industry sectors in India? Like Real estate, Healthcare etc.

  11. Yes this report may get more leverage now. Forget individual HNIs, big industrialists May be in trouble,if their debt levels are high. Some indebted countries,only depending on crude oil income, may face bankruptcy.This calamity is more serious than anyone can imagine.So be prepared for the worst.

  12. Hi everybody ,who have commented on this topic have different views and all I want to know is when these so called promoters borrow such huge chunks of money and become debtors without any solid payback guarantee how do every institution say they are the 2nd , 3rd or 1st richest person in the country and examples are in front of us now they don’t even have money to pay for the defence of a foreign judiciary, nobody can go by their books because they can be so easily manipulated and we don’t have a chance it will come out so easily until as we are seeing it they come open only when they don’t find any banks to fund them to meet their luxurious life style so why should they be given richest tags, it’s not their money to call them the richest, if a company without any debt at the end of their financial closing then we can call them the richest, having loads of debt into their account and calling them richest doesn’t make sense, going deep into it is a shame, a dignified daily wager earns his roti without any debt and these people make a living out of public funds and they get a special tag THE RICHEST, they are worst than a daily wager. Great Indian Corporate Day to Day functioning has to be monitored by the lenders and then or Companies, Banks and we Taxpayers are safe and our economy healthy. Jai Hind 🇮🇳.

    • Modi ji, a honest PM might be ensuring, black money coming back to main stream and miscreants are behind the bar
      जय हिन्द
      कर बिनु कर्म करहि विधि नाना, जै श्री राम जय वीर हनुमाना…
      जै श्री राम, परम आदरणीय श्री मन नरेंद्र मोदी महान हैं, देश दुनियां की शान हैं, मानो धरा पर अवतरित श्री भगवान हैं…
      जै हिन्द!

  13. This is just automation taking over the skilled manpower .They in turn curse the big and they simply fall.
    How come it is possible that without hard work by sittinng in AC rooms and looking and compiling data will solve this problem.
    Here in valley cutrently desi egg costs Rs 15
    Previously in hard times here the poor had the luxuary of desi murga and desi egg by rearing local breed some as a hoppy others by tradition .Now this is an luxrious item what was once so common.
    Thanks to 40 day Brioler chick weighing 2 kg with abundance of fat and residues of feed as steriods and harmones and antibiotics.
    The lesson is wisdom belongs to all ages

    • That’s nonsense.
      Check the statistics of npa’s when Congress was in government and when Modi is in government.
      It increased 10 fold.
      Modi is all talk and no show.
      Hod save india

      • Actually speaking loans were lent without asking modi right…?
        And now when actual people who r responsible for such irresponsibility r not into the question…?
        Congress being know for “license Raj” is one of the reasons for getting targeted….., It’s not like they have indulged in frauds but when scrutiny is performed any one of the members name usually crops up…… Even though not consistent

    • कर बिनु कर्म करहि विधि नाना, जै श्री राम जय वीर हनुमाना…
      जै श्री राम, परम आदरणीय श्री मन नरेंद्र मोदी महान हैं, देश दुनियां की शान हैं, मानो धरा पर अवतरित श्री भगवान हैं…
      जै हिन्द!

  14. Private sector banks fleece the corporate customers. They charge excessive penal interest rates when a business enterprise witnesses challenges. Rather they kill the sick instead of lending support at times of difficult economic scenario. Basically their attitude of being fair weather friends recoils on them as NPAs. It’s a very unhealthy relationship between businesses and private banks

  15. The main causes of problem of our Economy are the Industrialist and Bankers trust on each other strongly based on corruption of money while dealing the big and huge loan amount.

    One day the poor people’s money will be eaten by all, like Industrialist, Politicians and the corrupt big officials of the Bank.

  16. The gross reason of NPAs is lust for money not because of any economic slow down. Every economy has natural growth, but when you want to double your bank balance overnight this would happen. Every economy where people want quick buck they fail at some point of time sooner or later. I think if companies are failing it is good for economy in long run. Companies and business men must be routed out who have no business model and merely have intention to make quick buck. Unfortunately no promoter is punished in India like in developed economy. Moreover companies must shut down who are run by incompetent promoters who have political patronage nothing else.

    • I don’t understand why people take finance from NBFC at twenty four percent with three percent process fee, whereas same loan is given by sarkari banks at 14%

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