Singh Raids Banks to Curb Deficit as Loans Sour: Corporate India

India’s state-run banks are paying dividends to help Prime Minister Manmohan Singh meet his budget deficit goal even as they struggle with narrowing risk buffers and bad loans amid decade-low economic growth.

At least seven lenders have announced mid-year payouts this month with three more considering disbursements, according to filings. The banks, in which the government holds at least 55 percent, are forking out the money three months after Singh announced a 140 billion-rupee ($2.3 billion) infusion to boost capital as soured debt as a percentage of total loans surged to a six-year high in September.

Singh is leaning on state-owned companies for extra funds to cut the budget deficit to a six-year low of 4.8 percent of gross domestic product as a slowdown in the $1.8 trillion economy dented tax revenue before national elections due by May.

“The government may be getting part of the money as dividends with one hand, but will have to give back a higher amount as equity infusion with the other hand,” said Vibha Batra, a New Delhi-based co-head of financial sector ratings at ICRA Ltd., a local unit of Moody’s Investors Service. “This is simply deferring the problem of capital requirements at state-owned banks.”

The dividends may weaken the core capital of certain banks and hurt their credit profile when they are struggling to revive profit growth, Batra said.

Default Risks

Singh’s administration may garner about 90 billion rupees from the dividends paid by the banks, according to estimates by Vishal Narnolia, Mumbai-based banking analyst at SMC Global Securities Ltd.

The CNX PSU Bank Index representing 12 stocks of Indian state-controlled lenders has declined 35 percent in the past year, fueled by concerns default risks are rising after gross domestic product expanded 5 percent in the year ended March 31, the worst since 2003. The benchmark S&P BSE Sensex has gained 7.3 percent in the past 12 months. HSBC Holdings Plc predicts growth in Asia’s third-biggest economy may slow further to 4.6 percent in the fiscal year ending March 31.

The ability of most Indian companies to generate cash and service debt is at the lowest level since 2008, Deep Narayan Mukherjee, a Mumbai-based director at Fitch Ratings’ Indian unit, said by phone yesterday.

‘Intense Pressure’

State-run lenders have historically been under-capitalized relative to their privately owned peers as a regulation requiring state ownership be maintained at 51 percent curtails the banks’ ability to raise capital by selling shares. The government has injected cash into the lenders in each of the past four years, according to data compiled by Bloomberg.

“Banks will face persistent pressure on capital adequacy on profitability and margins,” said Arun Kaul, chairman and managing director of state-owned UCO Bank said in a telephone interview on Jan. 14. “Since capital is hard to come by, banks will face intense pressure on creating buffers.”

The Kolkata-based lender’s shares have lost 6 percent in the past year and closed at 77.40 rupees in Mumbai. Kaul declined to comment on the payout.

Bad loans at Indian lenders climbed to 4.2 percent of total lending as of Sept. 30, the highest level in at least six years, from 2.4 percent in March 2011, according to a Dec. 30 report from the Reserve Bank of India. State-run banks have “distinctly higher stressed advances,” according to the report.

Basel Rules

Capital-adequacy ratios at the state-run banks, based on so-called Basel III rules, were at an average 11.2 percent as of Sept. 30, lower than the 12.7 percent mean for all banks in the country, data compiled by the central bank show. The South Asian nation has a minimum regulatory requirement of 9 percent.

“Raising capital to maintain comfortable adequacy levels is going to be the biggest challenge for banks,” M. Narendra, chairman and managing director of state-owned Indian Overseas Bank said in a telephone interview on Jan. 15. “There’s no reason to be optimistic in the short term.” He didn’t comment on the payout.

Shares of the Chennai-based lender have slumped 44 percent in the past 12 months to 49.3 rupees.

State banks are among the companies that are offering dividends benefiting the majority shareholder. Coal India Ltd., the world’s largest producer of the fuel and owned 90 percent by the government, said on Jan. 14 it will pay a record 183 billion rupees, or 29 rupees a share.

Missed Goal

Singh is seeking revenue from dividends after failing to meet his goal of raising 400 billion rupees from the sale of stakes in state companies to fund a budget deficit that reached 94 percent of the full-year estimate in just eight months. Total revenue from taxes fell 52 percent short of target in that same eight-month period, April-November.

“The government is doing all it can to meet the fiscal deficit target,” Nandkumar Surti, Mumbai-based chief executive officer at the local unit of JPMorgan Asset Management, said in an interview on Jan. 13. “It would prevent any impact on its credit outlook at this point.”

India risks a junk credit rating on failure to pare the budget gap and reverse the policy drift as the nation heads for elections. Standard & Poor’s, which maintains the lowest investment grade for India, said in November that unless the polls due by May produce a government capable of reviving the economy, it may cut the rating.

State Infusions

State Bank of India, Indian Overseas Bank and UCO Bank are among 20 government-run banks that will receive the cash infusion to help them cope with soured and restructured loans that Fitch predicts may increase to 15 percent of advances by 2015, a 17-year high.

State Bank, the nation’s biggest, will get 20 billion rupees, while Indian Overseas Bank will get 12 billion rupees, according to the finance ministry.

Stressed assets, which include bad and restructured loans, rose to 10.02 percent, the highest in a decade, as of Sept 30, central bank data show. Banks’ profits and capital buffers are eroding as they need to set aside higher provisions for stressed assets. Profitability at Indian lenders, as measured by return on equity, fell to a six-year low of 10.2 percent in the year to Sept. 30, data compiled by the central bank show.

The government will need to put as much as 910 billion rupees into banks it controls by 2018 to help them meet Basel III standards, and to maintain its holdings, Duvvuri Subbarao, the then governor of the Reserve Bank of India, which is also the nation’s banking regulator, said in October 2012.

“The government is left with no choice but to raid the coffers of state-run institutions,” said SMC Global’s Narnolia. “Their attempt to narrow the fiscal gap is like putting band aid on a mortal wound.”