State Bank of India, the nation’s largest lender by assets, plans to sell part of its 492 billion rupees ($8.9 billion) of soured debt to boost asset quality and profit amid the slowest economic growth in a decade.
The government-controlled bank is working on the sale or recovery of 37 percent, or 180 billion rupees, of its bad loans, Soundara Kumar, who heads the bank’s stressed assets management division in Mumbai, said in an interview. She declined to elaborate or reveal a timeline for the sale.
“For the first time in recent years we are looking at selling non-performing loans,” she said. “We’ve been trying to recover all these loans on our own so far, with some success.”
The 207-year-old lender is seeking to boost net income as Indian banks’ bad-loan ratio jumped the most in at least five years in the 12 months ended Sept. 30. Indian steelmakers, textile producers and trading companies are struggling to repay debt as the highest interest rates among the major emerging economies in Asia and a weakening rupee erode their earnings, according to Kumar.
“The pace at which bad loans are rising is forcing them to clean-up the balance sheet by selling it,” said Nitin Kumar, a Mumbai-based banking analyst at Quant Broking Ltd. “Other state-run banks will follow as investors are becoming uncomfortable regarding stressed assets.”
Stressed assets at SBI, which include gross non-performing loans and restructured debt, rose to 5.98 percent of total loans as of September from 5.58 percent a year earlier, according to presentation material on its website.
Bad loans to steel, textile and trading companies account for more than one-fifth of SBI’s soured debt, according to Kumar, whose 200-member team recovered more than 5 billion rupees of written-off loans in the three months to Sept. 30.
SBI’s net income jumped 30 percent to 36.6 billion rupees in the quarter, beating analysts’ median profit estimate of 35.2 billion rupees. Last quarter’s earnings are due before mid-February.
Shares of the bank climbed to a 19-month high today after surging 47 percent last year, their biggest annual gain since 2009, according to data compiled by Bloomberg. That compares with a 26 percent advance in the benchmark BSE India Sensitive Index. SBI’s stock rose 1.2 percent to 2,522.80 rupees in Mumbai today, making it the best performer on the 14-member Bankex Index.
Stressed loans as a percentage of net advances at the bank are the lowest among the five largest state-run lenders by assets, SBI said in a second-quarter investor presentation on its website.
Amid slowing economic growth and waning demand for lending, Indian banks including SBI may face difficulties in price negotiations with asset reconstruction firms looking to buy bad loans, said Hatim Broachwala, a Mumbai-based analyst at Karvy Stock Broking Ltd.
“Banks and asset reconstruction companies almost never meet eye-to-eye on valuations,” he said. “The differences on valuation still remain a challenge in these sales.”
Asset reconstruction companies were formed after India’s parliament passed a law in 2002 to help banks sell their bad loans and cut risk.
Soured debt at Indian banks has increased as a percentage of total loans even as the Reserve Bank of India predicts lending growth will cool to the slowest pace in nine years in the 12 months ending March 31. Asia’s third-largest economy is forecast to expand 5.7 percent to 5.9 percent in the same period, according to finance ministry estimates, the smallest gain since 2003.
Bad loans at Indian banks rose to 3.6 percent of total lending as of Sept. 30 from 2.8 percent a year earlier, data provided by the nation’s central bank show. The RBI has said lending growth may be 16 percent in the current fiscal year, the least since 2004, according to data compiled by Bloomberg.
Bank loans, excluding advances to state agencies for food procurement, increased 16.3 percent in the 12 months to Dec. 14, according to RBI data.
A weaker rupee pushed up import costs for manufacturers, adding to the inability of borrowers to pay back debt, said Quant Broking’s Kumar. The local currency declined 3.5 percent last year against the dollar after a 16 percent plunge in 2011, the biggest two-year drop among Asian currencies, data compiled by Bloomberg show.
Nomura Holdings Inc. predicts the rupee will weaken to 59 per dollar by the end of this year. The currency strengthened 0.5 percent to 54.755 a dollar today.
Lenders are also resorting to revamping debt to strengthen their asset quality and boost investor confidence by offering borrowers a moratorium on repayment, extended maturities and lowered interest rates. Such renegotiated loans more than doubled in the year ended March 2012 to 2.2 trillion rupees, according to Moody’s Investors Service.
China’s five largest banks, which account for more than half of the nation’s lending market, had about 38 billion yuan ($6.1 billion) of renegotiated loans as of June 30, according to their semi-annual earnings reports. That accounted for 0.1 percent of their total advances.
SBI has 35 billion rupees of loans in the restructuring pipeline now, the Indian lender’s Kumar said.
“Large part of these stressed assets are backed by solid collaterals,” she said. “So sale or recovery of these assets shouldn’t be very difficult.”