Indian lenders are offloading soured debt at the fastest pace on record to bad-loan managers as policy makers goad banks to clean up their books amid signs of an economic revival.
State Bank of India, ICICI Bank Ltd. and 37 other financial institutions sold 100 billion rupees ($1.6 billion) of non-performing assets in the 12 months through March 2014, 20 times more than the year prior, CARE Ratings Ltd. estimated in a July 28 report. Bad loans in India accounted for 4 percent of total advances in the nation at end-March, versus 1.04 percent in China and 0.85 percent in South Korea, official data show.
“The margin has been very thin for all stakeholders and therefore it’s critical for banks to sell to asset reconstruction companies,” said Raj Kumar Goyal, an executive director in Mumbai at Central Bank of India, which is a commercial lender. “The worst is not yet behind us.”
Banks are selling the most delinquent loans since the nation’s first bad-loan manager was established in 2003 as Governor Raghuram Rajan told lenders to corral them or face penalties. Sales of stressed assets will help banks strengthen their balance sheets and boost loan growth amid optimism the new government of Prime Minister Narendra Modi will stabilize the economy and attract investment, according to Moody’s Investors Service.
Lenders have sold ever more bad debt each month to asset reconstruction companies since June 2013, data from the Reserve Bank of India’s June financial stability report show.
Public-sector banks accounted for 92 percent of the sales in fiscal 2014 versus 27 percent in 2013, while private-sector lenders’ share declined to 3 percent from 13 percent, the RBI said, adding sales may remain high during the next few quarters.
Last fiscal year was “most stressful for banks and the need strengthened to clean up their balance sheets and hence they turned to asset reconstruction companies,” said Anuj Jain, a senior manager in Mumbai at CARE Ratings. “The bad loans have mounted significantly, needing the expertise of asset reconstruction companies to manage the situation.”
Even more banks may offload their assets to bad-loan managers this fiscal year, he said.
Dollar borrowing costs for Indian companies averaged 4.66 percent on Aug. 1, the highest since May 23, JPMorgan Chase & Co. indexes show. Dollar-denominated debt sold by lenders in the nation has returned 6.48 percent this year through Aug.1, versus 4.86 percent for banks in China and an average 5.12 percent for Asia, according to Bank of America Merrill Lynch indexes. Sri Lanka’s bank debt is best at 10.93 percent.
The yield on IDBI Bank Ltd.’s $500 million 3.75 percent notes due January 2019 fell seven basis points to 4.03 percent today, the biggest drop in six weeks, Bloomberg-compiled prices show. Yield on ICICI Bank’s $1 billion 5.75 percent notes maturing in November 2020 dropped six basis points to 4.17 percent, set for the biggest one-day decline since July 10.
IDBI, ICICI and seven other Indian banks including Bank of India and Union Bank of India are among the 20 best performers in the region, the Bank of America Merrill Lynch financial index shows.
“There’s pressure on banks from all sides to strengthen their balance sheets and capital requirements under Basel III are looming large,” said Vibha Batra, the New Delhi-based head of financial-industry ratings at ICRA Ltd., the local unit of Moody’s. “Sales of bad loans to asset reconstruction companies could facilitate a faster recovery.”
Central Bank of India will need about 20 billion rupees in additional capital in the year to March 2015 and will ask for a 15 billion-rupee infusion from the government, Goyal said. Nonperforming assets rose to 6.15 percent on June 30 from 6.03 percent a year ago, he said.
At Chennai-based Indian Overseas Bank, gross nonperforming assets rose to 5.84 percent as of June 30 from 4.45 percent a year earlier, according to a July 26 stock exchange filing.
The RBI on March 27 gave banks up until March 2019 to comply with tougher capital thresholds under Basel III rules, saying weaker asset quality limited their ability to tap capital markets. At least 4.95 trillion rupees is needed to meet the new rules, the central bank estimated in its June report.
Basel III, introduced by regulators to force banks to implement better risk controls after the global financial crisis, requires lenders hold enough liquid assets, such as cash and sovereign bonds, to survive a 30-day funding squeeze.
Optimism growth in Asia’s third-largest economy will revive is rising after Modi’s May election victory. Modi, whose Bharatiya Janata Party won the election with the biggest majority in three decades, has pledged to accelerate investment in the nation’s highways, power plants, ports and housing.
India’s finance ministry predicts economic growth will quicken to 5.9 percent in the fiscal year through March 2015 from 4.7 percent the previous period. Gross domestic product increased 4.5 percent in 2012-2013, the slowest in a decade.
The cost of insuring Indian government debt against non-payment using credit-default swaps has fallen the most among BRIC nations this year, dropping 101.7 basis points to 168.7 basis points on Aug. 1.
India’s rupee advanced 0.4 percent to 60.94 per dollar as of 9:22 a.m. in Mumbai today, bringing gains this year to 1.35 percent.
Asset Reconstruction Co. (India) Ltd., the nation’s first bad-loan manager, will probably absorb 55 billion rupees of bad loans in the year to March 2015, or 25 percent more than a year earlier, as the economy improves, Mumbai-based Chief Executive P. Rudran said in a phone interview July 31.
India’s other bad-loan managers include Edelweiss Asset Reconstruction Co., JM Financial Asset Reconstruction Co. and Phoenix Asset Reconstruction Co.
“The bad loan situation should improve sooner than later with the efforts of the banks and policy makers,” Rudran said. “The sentiment has moved to a more realistic optimism from speculation that the macro-economic environment will improve. There’s confidence the asset reconstruction companies and banks will be able to manage the stress much better than before.”
The amount of money pledged to distressed-debt funds in the Asia-Pacific region including India totals $1.88 billion so far this year compared with zero in all of 2013 and $4.78 billion in 2012, according to data compiled by researcher Preqin Ltd.
“Distressed funds are active but it’s more a question of them picking up smaller pieces of loans,” Nilesh Parikh, a banking analyst in Mumbai at Edelweiss Securities Ltd., said by phone July 31. “They’d be picking up assets at the right time in the cycle because the economy is about to get stronger.”