Billionaire Kotak Says Bad Debts Are No. 1 Threat to India Banks

Billionaire Uday Kotak, the controlling shareholder of the Indian bank with the highest lending margins, said the nation’s increasing sour debts pose the biggest threat to its lenders.

“The No. 1 focus and concern for the system, the banking system, is rising bad loans,” Kotak, 53, said yesterday in an interview with Bloomberg Television from the Swiss city of Davos while attending the World Economic Forum. “A lot of large corporates have got themselves over-leveraged, and that’s where the pain is.”

Loans to the infrastructure and mining industries are particularly under duress, said Kotak, who is managing director of Mumbai-based Kotak Mahindra Bank Ltd. Indian banks’ bad-debt ratio jumped the most in at least five years in the 12 months ended Sept. 30 as the highest interest rates among the major emerging economies in Asia and a weakening rupee eroded companies’ earnings and crimped their ability to repay debt.

Companies borrowed $82.1 billion in the year ended March 31, 2011, surging from $52.5 billion in the 12 months ended March 2010 and almost four times the $21.3 billion of the prior year, data compiled by Bloomberg show.

Following that credit boom, restructured debt -- which gives companies a moratorium on payments, longer maturities or lower interest rates to avoid defaults -- more than doubled in the year ended March 2012 to 2.2 trillion rupees ($41 billion), according to Moody’s Investors Service.

‘Most Important’

For banks, “the single-most important issue at this stage is ensuring that the quality of the assets is in good shape,” Kotak said. “There are some banks that have taken a bigger exposure, some banks who have not.”

Kotak and his family own about 45 percent of the nine-year-old lender, a stake valued at about $4 billion, according to data compiled by Bloomberg.

The nation’s regulators also need to be cautious in extending new licenses to ensure the financial system’s stability. The plan to allow new entrants into the banking industry for the first time in more than eight years has triggered “a very big debate” about whether corporate houses should be considered eligible, Kotak said.

Indian officials need to particularly avoid allegations of corruption in distributing the licenses, the billionaire said. The nation’s top court last year revoked 122 spectrum licenses to telecommunications companies after authorities determined that the allocation process had been riddled with corruption.

“The Indian banking industry can do with a little bit more competition,” Kotak said. Regulators just need to ensure that “some of the issues which India faced in other sectors, which have led to a perception of crony-ism, does not get repeated when banking licenses are issued.”

Still, India’s banks are continuing to grow credit at about 15 to 18 percent, and Kotak Mahindra Bank is expanding loans at about 25 percent annually, he said.

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