Finance

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

India wants to create bad banks -- maybe as many as three more of them. 

New Delhi has set up a top ministerial panel that will clear merger plans proposed by lenders' boards. Investors who plowed into state-run banks on Wednesday, pushing an index of their shares 2 percent higher, are deluding themselves if they think this is some sort of reform.

Fading Hopes
An index of Indian state-run lenders jumped on Wednesday, but has been starting to underperform the benchmark Nifty 50 index
Source: Bloomberg

Warehousing nonperforming corporate loans, currently spread over a score of banks, into fewer, bigger piles will serve no purpose unless there's some guarantee of extra capital for the unlucky institutions that will end up absorbing the weaker ones, or at least a go-ahead for the merged entities to shed superfluous workers.

State Bank of India, the country's largest commercial lender, has set a template for a de facto bad bank. After absorbing smaller associated lenders, it now has 280,000 employees -- 70,000 more than before the merger -- and a cost-to-income ratio of 54 percent. Its nonperforming asset ratio is approaching 10 percent, almost 3 percentage points higher than pre-transaction.

Expect the same misery to befall Bank of Baroda, Punjab National Bank and Canara Bank Ltd., identified by Elara Securities as the "likely scapegoats" of further consolidation. Headquartered in western, northern and southern India respectively, they would be expected to acquire weak lenders from their regions.

Assume, like Elara does, that Bank of Baroda is asked to pick up Bank of Maharashtra Ltd. and/or Dena Bank Ltd. With its own bad loans at 11.4 percent of the total, how can it take on the burden of lenders with ratios of 17 to 19 percent?

Don't Give Me Your Tired, Your Poor
Bank of Baroda's own nonperforming asset ratio is in double digits; being asked to take over even weaker banks would be a disaster
Source: Bloomberg
*At the end of June 2017

Nobody on Canara Bank's board will be pining for money-losing Indian Overseas Bank, which has almost 30,000 staff. Payments to employees accounted for 77 percent of Indian Overseas' net interest income in the June quarter. Given how strong bank unions are, reducing surplus workers by letting them retire is no recipe to rein in a cost-to-income ratio of 61 percent.  

As Gadfly has argued, India's state-run banking system now resembles one giant bad bank. Unless it can pony up extra capital, there's no need for the government to create a new institution to park soured loans. By the same token, the push for weak banks to be merged with the not-so-weak is also senseless.

Nothing that the central bank and the government have thrown at cleaning up the $191 billion mess has worked. News that something is being done makes investors happy for a while and then, with another quarter of bad earnings and lousy asset-quality reports, the optimism dies.

It may be no different this time.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Eastern India may be left out because Kolkata-headquartered UCO Bank has a nonperforming asset ratio of almost 20 percent, while it's approaching 14 percent at Allahabad Bank Ltd. and is past 17 percent at United Bank of India. In other words, they're all basket cases.  

To contact the author of this story:
Andy Mukherjee in Hong Kong at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net