More Pain Predicted for Indian Banks by Largest Bad-Debt Buyer

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Edelweiss Asset Reconstruction Co., buyer of the largest amount of bad loans from Indian banks, expects the stressed-asset ratio in the country’s banking system to surge further from a 13-year high.

Edelweiss is anticipating more failures among corporate debt accounts amid a lackluster economic recovery, Chief Executive Officer Siby Antony said in an interview.

Government efforts to boost growth have so far failed to reduce the banking system’s stressed-asset ratio, which measures non-performing and so-called restructured loans. The ratio rose 1.3 percentage points in the year to March 31 to 11.1 percent as higher interest rates and slower-than-expected economic revival eroded borrowers’ ability to repay.

“The pain on asset quality will worsen further before any improvement can set in,” Antony said from his office in Mumbai. “It will take at least a year before we see any improvement.”

His comments augur poorly for lenders such as State Bank of India and Bank of Baroda, the country’s top two by assets, which both reported wider bad-loan ratios in the three months to June 30.

2002 Law

Edelweiss runs a business that is one of 14 asset-reconstruction companies formed out of a law passed in 2002 to help banks clean up their balance sheets.

The companies buy non-performing and restructured loans and sell them off after reviving struggling debtors through fund infusions and changes in business strategy. Restructured loans are advances that are given more generous terms to facilitate their repayment, including longer maturities or lower interest rates. Lenders don’t have to classify them as non-performing.

India had 2.7 trillion rupees ($41 billion) of loans in the restructured category and more than 3 trillion rupees of non-performing loans, latest central bank data show. While the government announced a $3.1 billion recapitalization plan for state-run lenders on Friday to bolster their risk buffers, it didn’t provide any specific plan to address stressed assets.

“Although challenges do exist for the banks, there’s no cause for panic,” Finance Minister Arun Jaitley told reporters in New Delhi after the announcement.

Shares of State Bank of India, the country’s largest lender by assets, have lost 9 percent this year while those of Punjab National Bank are down 22 percent. ICICI Bank Ltd. fell 15 percent, compared with the 1.2 percent gain in the benchmark S&P BSE Sensex Index.

Revamped Loans

Edelweiss’s business has bought more than 400 billion rupees of both types of debt since its inception in 2010.

The restructured loans must be classed as delinquent or healthy within two years and Antony is expecting many of these to sour amid tepid growth. Restructured assets that turned bad almost doubled to 570 billion rupees in the year ended March 31, according to data from the Corporate Debt Restructuring Cell, an agency that oversees the revamping of credit.

Edelweiss expects a surge in bad-debt sales by banks to asset-reconstruction companies this year as lenders take advantage of a central-bank incentive offered in May, Antony said. Under that initiative, lenders will be allowed to spread losses from selling soured debt over eight quarters, as long as the transaction is completed before March 31.

A rule change this year increases the burden restructured assets place on Indian banks. Prior to March 31, banks made provisions for just 5 percent of loans identified as restructured versus more than 15 percent for bad debt, which encouraged banks to classify large amounts of stressed assets in the first category. The RBI now obliges lenders to provision for restructured loans as they do for soured debt.

“Forbearance allows banks to postpone provisioning for bad loans,” Reserve Bank of India Governor Raghuram Rajan said during a speech in November. “When eventually the hidden bad loans cannot be disguised any more, the hit to the bank’s income and balance sheet is larger and more unexpected.”