Investigation into Loan Default Problems in Infrastructure, Real Estate, and Constructions Sectors facing the New Generation Private Sector Banks in India

Investigation into Loan Default Problems in Infrastructure, Real Estate, and Constructions Sectors facing the New Generation Private Sector Banks in India

Rituparna Das (University of Petroleum and Energy Studies, Dehradun, India)
DOI: 10.4018/978-1-4666-5154-8.ch009
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Abstract

The rating agency Standard and Poor's recently warned that India could become the first of the BRIC economies to lose its investment-grade status because of the slowing down of growth prospect in the face of bad loans. Against the backdrop of the loan defaults in the real estate and infrastructure sectors leading to the slackening of economic growth, which caused downgradation of India's international credit rating, this chapter aims to inquire into the modus operandi of credit rating by banks and rating agencies, the impact of economic downturn on the behaviors of borrowers as well as lenders, mode of calculation of default probability, and the unaddressed needs of academic and professional research.
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Background

Livemint and the Wall Street Journal (2013) reported that (a) many of the infrastructure projects would hit their project completion deadlines from the next fiscal year onwards when they would have to start making the loan repayments and (b) outstanding bank loans to infrastructure firms rose to Rs.6.9 trillion as of 31 December 2012 from Rs.5.96 trillion a year ago followed by growth of such credit slowing down to 16% in the 12 months that ended in December 2012 from 20.5%. Dun and Bradstreet (2012) found that many retailers on the supply side are slowing down their expansion plans and many real estate developers are falling behind schedules in their shopping mall projects considering the credit crunch, because the economic slowdown has deeply affected the Indian organized retail sector in terms of deceleration in retail sales growth, footfalls, store expansions, employment rates and most importantly, profitability. In a similar note of tune, Indian Express (2010) reported that RBI had hiked the risk weight on commercial real estate project loans to 1 per cent from 0.4 per cent. It cited more than 40 per cent increase in loans to commercial real estate and also added a note of caution on the fact that nearly 14 per cent of commercial realty assets were restructured by banks. In industry-wise chronological break-up CRISIL (2011) found that the number of defaults in real estate doubled in December 2011 over last year. ICRA (2011) maintained that historically banks have been taking exposure to state power projects as well as independent power projects but many banks approaching the exposure cap on lending to the power sector and given the concerns hovering over the prospects of the sector itself, the pace of growth of credit to this segment could slow down. Standard & Poor’s (2012) has warned that India could become the first of the BRIC economies to lose its investment-grade status because of slowing down of the growth prospect in the face of bad loans (Pandey & Shah, 2012).

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Objectives

This chapter intends to have insight into

  • 1.

    The modus operandi of credit rating by banks and rating agencies.

  • 2.

    The impact of economic downturn on the behaviors of borrowers as well as lenders.

  • 3.

    Mode of calculation of default probability.

  • 4.

    The unaddressed needs of academic and professional research.

Key Terms in this Chapter

Probability of Default: Measure of the chance of the borrower's not paying a scheduled payment towards his loan account.

Non-Performing Asset: A loan asset, for which there is more repayment, i.e., a defaulted loan with no cash flow to the lender.

Exposure at Default: The outstanding loan principal amount to be calculated at the time of a default event.

Loss given Default: The loss amount calculated by the borrower after every default event.

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