>BANKING & TEXTILE SECTOR (EDELWEISS)

This note highlights key observations from our discussions with industry participants (including banks, textile companies etc.) in Coimbatore (Tirupur, Karur and Erode) - targeted at assessing banks’ asset quality and demand outlook. Business of this export-dependent region has slowed down significantly on account of poor global demand and stiff competition. Availability of low-cost Textile Up-gradation Funds (TUF) and foreign currency derivatives (which led to further reduction in
effective cost of funds) have led to huge capacity expansion in the region, which is currently more than double of the demand. We understand that, roughly 60% of loans in the region are under restructuring. Official unemployment data is not available; however considering the capacity utilisation of less than 50% and practice of contract labour in the region, unemployment is expected to have gone up - impacting retail asset quality further. However, this is possibly the worst sample in India and, hence, we cannot generalize the phenomenon for the country. We are getting positive feelers from domestic consumption-based textile companies in other regions. Around ~25%
default rate has been observed in small business loans (below USD 100 K) funded by banks and NBFCs.

Key observations (Textiles sector)
■ In general, export demand is still weak; both pricing and order book is hurting.
■ April-May has been better than Q4FY09 (no orders) for some companies due to demand from Europe.
■ Domestic demand is still good and some companies are setting up local sales counters (domestic business, however, accounts for a small proportion of companies’ business).
■ Apart from general slowdown, international competition is hurting margins badly – for example, Bangladesh gets 10% extra realization for the same quality; Turkey gets higher realization due to better turnaround time and proximity to markets.
■ Companies want more duty drawbacks from the government to compete with Bangladesh; they are also demanding better infrastructure and labour laws to compete with Turkey.

Others
Engineering companies of Coimbatore are relatively better placed and are still seeing order flows. However, even these companies are supplying machinery to textile units under severe pressure; revenue declined 60-70% Y-o-Y (eg. Laxmi Machine Works).

Key observations (Banks/NBFCs)

Loan enquiries going down; more restructuring likely
■ Banks have been liberal in restructuring (more to happen in April-June 2009 than reported); there seems to be no other alternative with banks.
■ Banks, in general, have tightened credit and have reduced exposure wherever possible.
■ NBFCs were very active in small loans segment; they have, however, stopped business now due to high delinquencies.
■ Nearly 20-25% of small business loans (ticket size of INR 1.5-5.0 mn) are delinquent due to business slump.
■ Small business loan enquiries have come down significantly; housing loan enquiries have also declined.

Forex derivative issues are settling down
As 90% of receivables were foreign currency denominated, many companies (irrespective of size) entered into derivatives to lower their cost of funds further (mostly USD/CHF swaps). Banks have taken different approaches to solve the problem; some of them have converted MTM receivables into term loans and some have restructured derivative contracts through embedded contracts, while others are fighting legal battle and have reported NPLs. Most of these cases are closed, either through out-of–the-court/one-time settlements or by term loans.

Retail credit quality: To experience more stress
Retail credit quality is adversely impacted, as bulk of the small ticket loans were taken for business. Nearly ~25% default rate has been observed in small business loans (below USD 100K) funded by banks and NBFCs. Also, the number of shifts has clearly reduced; companies are not even working for two shifts now.

Official unemployment data is not available; however considering capacity utilisation of less than 50% and practice of contract labour in the region, unemployment is expected to have gone up - impacting retail asset quality further.

Though housing prices have not corrected in line with the deterioration in income levels of this region, housing demand has come to a standstill, which portends lower property prices, going forward.

To see full report: BANKING & TEXTILE SECTOR