ICICI Bank's takeover of a stake in a debt-laden telecom tower firm is an ominous sign of things to come as India's slowing economy and slumping shares erode the value of collateral on loans that companies are struggling to repay.
Weak markets, the global debt crisis and surging interest rates will further cripple Indian companies' ability to raise funds and manage borrowings and could worsen banks' credit quality.
State-run lenders, which account for 70 percent of the country's total advances, have voiced concerns over loan-repayment capabilities of borrowers after a rise in bad debts.
Compounding the problem, founders of several companies have pledged their shares for loans, meaning that as stocks fall, banks are demanding a top-up in security.
More than $33 billion worth of shares have been pledged with banks as collateral, with founders of as many as 17 companies pledging over 90 percent of their holdings, Bank of America-Merrill Lynch said in a June report.
"This is over-leveraging. It's like a fire. It will hit both the corporates and the banks," said Jagannadham Thunuguntla, equity head at brokerage SMC Capitals.
"There are some companies where the founders have pledged almost 100 percent of their shareholding. It could backfire."
Text: Swati Pandey, Reuters
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