Cash Crunch Driving ICICI Risk Up by Most in Asia: India Credit

Costs to protect the bonds of Indian banks against default are rising at the fastest pace among Asian lenders as a worsening cash crunch threatens profits.

Five-year credit-default swaps on Mumbai-based ICICI Bank Ltd. (ICICIBC), the nation’s largest private lender, jumped 76 basis points in the past month to 471 basis points, the biggest advance in the region, while those for government-controlled State Bank of India (SBIN) rose 43 to 361, according to data provider CMA. Similar contracts for China Development Bank fell 15 to 283 and those for Korea Development Bank slipped 10 to 178.

Lenders in India have borrowed from the central bank each day since April to meet fund shortages as policy makers raised interest rates seven times in 2011 to slow inflation that has stayed above 9 percent. The Reserve Bank of India won’t compromise on its fight against price increases to address the cash deficit in the financial system, Deputy Governor Subir Gokarn said last week.

“Banks face risks on profit margins because of policy makers’ stance on liquidity,” Aneesh Srivastava, the Mumbai- based chief investment officer at IDBI Federal Life Insurance Co. that oversees about $430 million, said in an interview on Dec. 4. “The central bank has to bring inflation down so it will ensure that cash is available at a higher premium.”

The average cost of credit-default swaps insuring against non-payment by five Indian lenders more than doubled in 2011 as the Reserve Bank boosted the repurchase rate by 225 basis points, or 2.25 percentage points, to a three-year high of 8.5 percent. Swaps for State Bank, the largest lender and a proxy for the nation, hit a two-year high of 397 basis points this quarter, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Interbank Loan Rates

Credit swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a nation or company fail to adhere to its debt agreements.

Indian banks borrowed an average 745 billion rupees ($14 billion) a day from the central bank this quarter, compared with 438 billion rupees in the three months to Sept. 30, as rising benchmark rates bolstered funding costs in the money market. Rates on overnight interbank loans climbed 315 basis points this year to 8.65 percent, according to data compiled by Bloomberg. Inflation was 9.73 percent in October, the fastest pace among Asia’s 10 biggest economies.

‘No Sustained Easing’

“The outlook is not really comforting on the liquidity front because there is no sustained easing in inflation,” Diwakar Gupta, a managing director at Mumbai-based State Bank, said in an interview on Dec. 4. “So there will be implications on the performance of the banking industry while inflation is what it is.”

State Bank will cancel untapped lines of credit and reorganize its balance sheet to boost the amount of available funds as it waits for an injection of funds from the government, Chairman Pratip Chaudhuri said in an interview yesterday in Mumbai. The lender has set up a panel to review ways to conserve capital, Chaudhuri said.

Moody’s Investors Service downgraded the outlook for India’s banking system last month to “negative,” saying a domestic economic slowdown and the surge in borrowing costs will boost bad loans. State Bank had its financial strength rating cut by the ratings provider in October on inadequate capital buffers and rising non-performing credit. The Bankex index (BANKEX), the nation’s main gauge of banking stocks, has lost 26 percent this year.

No ‘Dramatic Recovery’

Non-performing assets at the biggest Indian lender rose to 4.19 percent of total debt last quarter from 3.35 percent a year earlier. Bad-loan provisions jumped 35 percent to 29.2 billion rupees in the same period. India’s industrial production shrank 5.1 percent from a year earlier in October, the first decline in 28 months, government data showed yesterday.

“India’s growth momentum has been slipping in the last few months, and we don’t expect a dramatic recovery in the near term as long as the export outlook remains clouded, borrowing costs high and business confidence low,” Atsi Sheth, a credit analyst at Moody’s, said in an e-mail on Dec. 8.

The government’s decision last week to suspend plans to allow overseas investment in the retailing industry due to lack of political consensus will further hurt investor confidence, Moody’s said in a research note yesterday.

“The policy reversal is credit negative,” Mumbai-based Sheth wrote in the note. “It reinforces the popular view that Indian politics hamper the government’s ability to implement policies decisively.”

Bank Lending Slows

Annual increases in bank lending slowed to 17.6 percent last month from 24.4 percent at the end of 2010, according to central bank data. Sales of rupee-denominated bonds by Indian companies shrank 23 percent this year to 1.49 trillion rupees from 2010, data compiled by Bloomberg show. The Reserve Bank forecast in June that bad loans will rise 25 percent in the year to March to 2.91 percent of total credit.

Mumbai-based ICICI Bank bought the first rupee-denominated credit-default swap contract last week to guard against the risk of debt defaults. The lender bought credit protection on Rural Electrification Corp.’s one-year bond from Mumbai-based IDBI Bank Ltd., N.S. Venkatesh, head of treasury at IDBI, said on Dec. 7.

Lower Returns

Yields in India’s government and corporate notes have gained this year as the central bank boosted benchmark rates. Yields on 10-year sovereign bonds climbed 53 basis points in 2011 to 8.47 percent. The yield on the 8.79 percent note due 2021 fell nine basis points yesterday in Mumbai, according to the central bank’s trading system. The extra yield demanded by investors to hold the notes over similar-dated U.S. Treasuries has widened 182 basis points to 644 in 2011.

Rupee-denominated bonds returned 5.1 percent in 2011, compared with the 20 percent earned by Indonesian debt, according to HSBC Holdings Plc indexes.

The Indian rupee’S 15 percent slide in 2011, the worst performance among Asian currencies, will also boost the risk of bad debt, according to Morgan Stanley. The currency slid 1.5 percent yesterday to 52.8350 per dollar and touched a record-low 52.84.

“Higher cost of capital, a slowdown in growth, and foreign-exchange volatility are likely to result in a further rise in non-performing loans,” analysts at Morgan Stanley led by Hong Kong-based Chetan Ahya wrote in a research note dated yesterday.

To contact the reporters on this story: Anoop Agrawal in Mumbai at; Jeanette Rodrigues in Mumbai at

To contact the editor responsible for this story: Sandy Hendry at

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