Bad Debt Seen at Decade High by Arcil in Dire Case: India Credit

Bad loans at Indian banks are headed for a decade high as the slowest economic growth since 2003 and Asia’s highest interest rates strain corporate finances, according to the nation’s largest debt reconstruction company.

“This is the time to act as we are progressively heading toward a dire situation,” P. Rudran, chief executive officer at Asset Reconstruction Company (India) Ltd., set up by the nation’s biggest lenders to reorganize non-performing credit, said in a Feb. 2 telephone interview. “A significant part of the restructured loans at banks may go bad.”

Bad debt plus restructured assets, a combined measure of delinquencies that the central bank plans to put into effect in 2015, has exceeded 10 percent of total advances, the most since 2002, according to the Mumbai-based body known as Arcil. Crisil Ltd., the local unit of Standard & Poor’s, says a weak economy will fuel defaults and has cut ratings for 492 companies in the six months through September, compared with 322 upgrades.

The average cost for insuring the bonds of seven Indian issuers against non-payment for five years has climbed 16 basis points from an 18-month low of 235 reached on Jan. 9, according to data provider CMA, which is owned by McGraw-Hill Cos. A similar measure for Asian debt rose 6 basis points to 130 during the same period.

Non-performing loans as a proportion of banks’ total credit jumped the most in at least five years in the 12 months through September to 3.6 percent, the Reserve Bank of India said in a Dec. 28 report.

Slowing Growth

The monetary authority predicted that the economy will expand 5.5 percent in the year ending March 31, which would be the smallest gain since 2003. Bank lending in India has slowed as cooling growth sapped demand and fueled concern about debt defaults. Loans increased 16.3 percent in the 12 months ended Jan. 11, according to the latest RBI data, compared with an average pace of 24.1 percent in the past decade.

“Funds are blocked up in non-performing assets,” Arcil’s Rudran said. “If this money could be recycled and put into productive use, that will boost the economy. There is a dire necessity to reduce stressed assets at banks.”

Arcil was the first of Indian asset reconstruction firms that were formed after the parliament passed a law in 2002 to help banks sell their bad loans and cut risk. State Bank of India, ICICI Bank Ltd. and Punjab National Bank each hold more than a 10 percent stake in the company.


Rising bad debt poses the biggest threat to Indian lenders, billionaire Uday Kotak, the controlling shareholder of Mumbai-based Kotak Mahindra Bank Ltd., said last month. Loans to the infrastructure and mining industries are particularly under duress, according to Kotak, who is also managing director of the Indian bank with the highest lending margins.

“The No. 1 focus and concern for the system, the banking system, is rising bad loans,” Kotak, 53, said on Jan. 24 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.”

Indian companies’ borrowings surged to $82.1 billion in the year through March 2011, from $52.5 billion 12 months earlier, data compiled by Bloomberg show. After that credit boom, restructured debt -- which gives firms 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.

‘Specialized Job’

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, according to their semi-annual earnings reports.

“Restructured loans are going to be a big burden on banks,” said Rudran. “They will have to take steps to control it, including sale of bad loans to asset reconstruction firms. Banks can then concentrate on core businesses, which will be a much better proposition than wasting time on a specialized job like loan recovery for which ARCs have built a specialized structure over time.”

An economic-policy overhaul by Prime Minister Manmohan Singh’s government to revive growth may help improve corporate finances and rein in stressed assets, according to Mumbai-based brokerage SMC Global Securities Ltd.

Since mid-September, Singh has cut energy subsidies, opened up industries including aviation and retailing to foreigners and reduced taxes on companies’ overseas debt. More than 70 percent of the companies in the BSE India Sensitive Index posted earnings that beat estimates in the past month.

Policy Support

“Incremental slippages in banks’ asset quality are expected to slow down in the coming quarters with the economy showing signs of bottoming out,” said Vishal Narnolia, Mumbai-based banking analyst at SMC Global. “The government’s renewed focus on pushing infrastructure projects and removing bottlenecks will help in recovering bad loans.”

A surge in rupee debt costs since 2009 also contributed to the decline in credit quality in India. RBI Governor Duvvuri Subbarao boosted the benchmark repurchase rate by a record 375 basis points, or 3.75 percentage points, through 2010 and 2011. The rate, currently at 7.75 percent after two reductions in the past year, is still more than double similar gauges of 3 percent and 2.75 percent, respectively, in China and South Korea.

Rupee-denominated five-year corporate debt rated AAA by Crisil yield an average of 8.86 percent, according to indications compiled by Bloomberg. Similar notes offer 4.84 percent in China. Ten-year sovereign bonds in India pay 7.93 percent, compared with 3.59 percent in China and 2.05 percent in the U.S.

Rupee Yields

The yield on the 8.15 percent government debt due June 2022 slipped 1 basis point as of 12:02 p.m. in Mumbai, offering an extra 597 basis points over Treasuries. Indian sovereign notes earned 10.6 percent in the past year in the best performance among Asia’s 10 biggest markets, according to HSBC Holdings Plc data. The rupee was little changed at 53.30 per dollar today.

“Asset quality at banks can’t be insulated from the economy,” S.S. Mundra, Mumbai-based chairman and managing director at state-owned Bank of Baroda, said in an interview on Feb. 4. “We are expecting challenges from non-performing loans to continue for at least another three quarters.”