Burned Indian Bankers Turn Scrooges After Bad Loans Swell Losses

  • Rebound in loan growth to 11.6% in February proves a blip
  • Credit will revive ‘once the cleaning up’ is over: Sundaram

It’s back to square one. Loan growth at Indian banks is slowing again, proving that a rebound seen in February was just a blip.

Credit grew 9.16 percent in the 12 months through April 29, the least since October, and compared with an average of about 14 percent over the last five years, fortnightly central bank data compiled by Bloomberg show. Growth reached as high as 11.6 percent in the period through Feb. 19.

A lending revival has eluded Prime Minister Narendra Modi, hindering efforts to spur investment as he completes two years in office this week. Twelve Indian state-run banks reported combined losses of 206 billion rupees ($3.1 billion) for the March quarter, hurt by surging bad debts. That’s made banks unwilling to part with funds, just as falling short-term commercial paper rates drive borrowers to the money markets, according to Sundaram Asset Management Co.

“The credit growth trend can only pick up once the cleaning up of banks’ balance sheets is over,” said Dwijendra Srivastava, Mumbai-based chief investment officer for debt at Sundaram Asset, which oversees the equivalent of $3.5 billion. “Entities that can tap the money markets are already doing that for their working capital requirements.”

Short-term borrowing costs have eased in response to steps taken by Reserve Bank of India Governor Raghuram Rajan to boost cash supply in the financial system besides lowering the benchmark repurchase rate on April 5 to a five-year low. Three-month commercial paper rates have slumped 72 basis points from March 31 to 7.96 percent, after surging 117 basis points in the previous two quarters, data compiled by Bloomberg show. The base rate for State Bank of India, the nation’s largest, stands at 9.30 percent.

Proven Right

Rajan started an audit of banks’ nonperforming loans on Oct. 1 in a bid to improve disclosure of soured credit and force banks to set aside more cash to cover potential write-offs. While some investors had anticipated this would result in higher nonperforming-asset disclosures, the scale of losses and bleak statements from executives surprised analysts and cast a shadow on the chances of a pickup in credit.

That’s justifying skeptics including Nomura Holdings Inc., which said following the February data that the upside in loan growth was limited.

Government-controlled lenders account for more than 70 percent of loans in the banking system. Punjab National Bank posted a record quarterly loss of 53.7 billion rupees last week, exceeding the 857 million-rupee loss forecast by analysts in a Bloomberg survey. The lender said it won’t pay a dividend, the first time since at least 2006 that it has skipped a payout, data compiled by Bloomberg show.

More Time

“Banks now have an agenda of cleaning up their books, so they are focusing more on quality of assets,” said Siddharth Purohit, senior research analyst with Angel Broking Ltd. in Mumbai. “It might take another couple of quarters before they decide on fresh lending.”

A revival in bank credit is needed as Modi strives to maintain the fastest growth rate among the world’s major economies. Asia’s third-largest economy expanded 7.6 percent in the year to March 2016.

‘Not in Position’

UCO Bank, another state-owned lender, saw its gross bad-debt ratio surge to 15.4 percent last quarter. That compares with 5.1 percent overall for the banking system as of September, according to the latest data available from the RBI. Indian lenders had $131 billion of impaired assets, or about 14 percent of their total lending, as of Sept. 30. The RBI hasn’t provided any figures on soured debt since the audit completed at the end of March.

While the end of that assessment was supposed to have marked a turning point for bad-debts, those expectations have now been delayed. Fitch Ratings, which had said in November that stressed-asset ratios would peak by the end of the first quarter, this month estimated a possible “inflection point” in March of next year.

“Many banks aren’t in a position to grow loans at the moment,” Gaurang Shah, vice president at Geojit BNP Paribas Financial Services Ltd., said by phone. “The pain will be visible in asset quality and profits at most state-run lenders for the next few quarters.”

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