Indian Banks’ Rising Bad Debt Is ‘Major Challenge,’ RBI Says

Rising bad loans at Indian lenders remain “a major challenge” amid a slowdown in Asia’s third-largest economy, the nation’s central bank said.

Nonperforming loans rose to 986 billion rupees ($15.7 billion) at the end of March from 652 billion rupees a year earlier, the Reserve Bank of India said in a report yesterday on the country’s banking industry. The ratio of sour debt to total lending swelled to 3.6 percent from 3.1 percent.

More debtors are finding it harder to pay off loans in a $1.8 trillion economy that is projected to grow in the year ending March 2014 at the weakest pace in more than a decade. Rising bad loans contributed to a 35 percent slump in State Bank of India’s net income for the quarter ended Sept. 30.

“Macro stress tests indicate that if the current macroeconomic conditions persist, the credit quality of commercial banks could deteriorate further,” the Mumbai-based RBI said. “In the short term, the stress on banks’ asset quality remains a major challenge.”

The increase in bad loans underscores the challenge the government of Prime Minister Manmohan Singh faces in expanding the banking industry’s reach to encompass the 65 percent of Indians who don’t have accounts. The RBI introduced rules on Nov. 6 removing branch restrictions on overseas lenders that form local units. New banking licenses will be granted in January, Finance Minister Palaniappan Chidambaram said Nov. 15.

Biggest Lender

State Bank of India shares fell less than 0.1 percent to 1,762 rupees as of 10:53 a.m. in Mumbai. The stock slumped 26 percent this year, more than the S&P BSE India Bankex index’s 14 percent drop.

SBI, the nation’s largest bank by assets, had the highest nonperforming loan ratio of the 11 lenders tracked by Bloomberg Industries. Its gross ratio of sour debt to total lending widened to 5.64 percent in the three months to Sept. 30 from 5.15 percent a year earlier, the Mumbai-based bank said in a filing on Nov. 13.

Provisions for defaults rose 44 percent in the period, the filing showed. The lender’s more than 15,000 branches control 16.8 percent of the nation’s 73 trillion rupees of deposits, according to central bank data.

SBI will continue in coming months its “war on bad loans,” which will fall sustainably only when economic growth picks up, Chairman Arundhati Bhattacharya said Oct. 8.

India’s economy may grow 4.8 percent in the year through March 2014, based on a compilation of forecasts from other organizations, the RBI said in an Oct. 28 report. That would be the slowest pace since 2003, and compares with a July projection of a 5.7 percent expansion.

Moody’s Outlook

The central bank yesterday reiterated the need to ease in a “calibrated way” a rule requiring banks to invest in government bonds to enable them to extend more loans to productive sectors of the economy. Banks currently have to invest 23 percent of their deposits in government bonds.

Moody’s Investors Service reiterated its negative outlook for the Indian banking system in a Nov. 18 report, a view that the ratings company has held since November 2011.

“The negative outlook reflects our views that economic growth will be weak,” Moody’s said in the report. “Banks’ asset quality will deteriorate and profitability will decline.”

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