India Bad-Loan Battle Reassures Holinger on Yield Drop

Customers enter a State Bank of India automated teller machine (ATM) branch in Jaipur, Rajasthan, India. SBI’s bond risk fell this year, after the biggest annual decline in three years in 2012. Photograph: Sanjit Das/Bloomberg Close

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Customers enter a State Bank of India automated teller machine (ATM) branch in Jaipur, Rajasthan, India. SBI’s bond risk fell this year, after the biggest annual decline in three years in 2012. Photograph: Sanjit Das/Bloomberg

Indian banks’ dollar borrowing costs will extend their decline to a fourth quarter as lenders follow orders for an unprecedented cut in bad loans, Holinger Asset Management AG and KBC Asset Management SA predict.

State Bank of India (SBIN), the nation’s largest lender, sold $1 billion of 5 1/2-year notes on April 18 at 255 basis points above U.S. Treasuries, compared with the 375 basis-point premium it paid to issue similar-tenor paper in August, data compiled by Bloomberg show. The average spread on Indian dollar bonds has fallen 39 basis points to 328 this year and touched a two-year low of 309 on March 14, HSBC Holdings Plc indexes show. A similar gauge for Asia climbed nine basis points.

Prime Minister Manmohan Singh’s government on April 17 directed state-run banks to slash gross bad loans this fiscal year ending March 31 to 1 percent of total assets from 4.1 percent in September. India’s lenders will also need to raise as much as 1.75 trillion rupees ($32 billion) from equity sales to meet Basel III capital rules, the central bank estimates.

“The government is keen and making efforts to straighten a lot of things, and one priority is the balance sheet of banks,” Koen Vanderauwera, a bond-fund manager at KBC Asset in Luxembourg, who holds more than $90 million of Indian corporate bonds including debt in SBI, said in a telephone interview on April 19. “Offerings from strong banks should attract investors and would get the benefit of the optimism which persists.”

All-Time Low

Average dollar yields for all Indian issuers fell to an all-time low of 3.805 percent on March 18 and are at 3.92 percent, HSBC indexes show. The measure fell 194 basis points in the previous three quarters. A similar gauge for all Asian debt in the U.S. currency was at 3.50 percent. The yield on SBI’s 6.439 percent perpetual dollar bond fell 15 basis points this month to 6.71 percent, after dropping 245 basis points in preceding nine months.

The government is discussing issues related to bad loans, audits and project evaluations with state-run banks, Rajiv Takru, secretary at the department of financial services in the Ministry of Finance, said in an April 17 interview in New Delhi. Lenders should improve internal accruals to reduce dependence on the government for funding requirements, he said.

SBI’s bond risk fell this year, after the biggest annual decline in three years in 2012. The cost to insure its debt for five years against non-payment using credit-default swaps has dropped 26 basis points this year to 200, according to data provider CMA, which is owned by McGraw-Hill Cos. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

‘Worst Behind’

“Investors perceive the worst for the banking sector on bad loans is behind,” Daniel Gonzenbach, a portfolio manager helping oversee $4.2 billion of emerging-market assets at Zurich-based Holinger Asset, said in a March 12 telephone interview. “There is no reason to believe the bad-loan conditions won’t improve, which will be the single largest factor in making their debt attractive.”

Soured debt as a proportion of total bank lending climbed to 3.6 percent in September, the highest in at least five years, as the economy slowed, according to the last such data released the central bank on Dec. 28. India’s gross domestic product expanded 5 percent in the 12 months ended March 31, least in a decade, according to government estimates.

Monetary Easing

Reserve Bank of India (BOI) Governor Duvvuri Subbarao has responded to flagging demand by lowering the repurchase rate by 50 basis points, or 0.5 percentage point, this year to 7.5 percent.

“The bad loan situation isn’t moving in a direction the way bankers and policy makers expected it to after the monetary easing,” N. Seshadri, executive director at Mumbai-based Bank of India, the fourth-largest state-run lender by assets, said by telephone on April 23. “Further monetary policy easing will determine whether or not bad loans drop significantly.”

Bonds are rallying on signs of further rate cuts. The yield on 10-year government bonds declined 9 basis points last quarter, and offer an extra 603 basis points over U.S. Treasuries, data compiled by Bloomberg show. The yield on the benchmark 8.15 percent debt due June 2022 was little changed at 7.74 percent. The rupee rose 0.4 percent to 54.1550 a dollar in Mumbai. Markets were closed yesterday for a holiday.

Rupee-denominated sovereign bonds returned 14 percent in the past year, the most after Philippine notes among Asia’s 10 biggest local debt markets tracked by HSBC.

‘Significant Reversal’

The chairman at Mumbai-based State Bank of India, Pratip Chaudhuri, expects bad loans to decline in the six months ending Sept. 30 as lenders cut loans that are not backed by collateral. The bank’s bad debt dropped to 490 billion rupees in the quarter ended March 31, from 534 billion rupees in the previous period, he said at a April 16 media briefing in Mumbai.

“We are going to see a significant reversal in the bad loan situation because banks are cutting unsecured lending and are going after liquidating the existing bad loans,” Chaudhuri said in a Bloomberg TV India interview on April 23. “Our efforts will reduce bad loans for at least the next couple of quarters.”

Finance Minister Palaniappan Chidambaram in February pledged to add 140 billion rupees to boost capital at state-run lenders for the year that began April 1. That will help banks that need to more than triple the amount of core capital lenders must hold from 2019 to meet Basel III rules.

“What the government has outlined is going to be unprecedented and is the most significant development in the past several years,” M. Narendra, Chairman of Chennai-based Indian Overseas Bank (IOB), said in an April 19 telephone interview. “Banks will depend less on the government for capital when the target is achieved and it will lift the efficiency of the banking system as a whole.”

To contact the reporters on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net; Anto Antony in Mumbai at aantony1@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net; Chitra Somayaji at csomayaji@bloomberg.net

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