Bad loans hike Indian banks’ risk of default
Restructured lending souring at record pace
singapore/mumbai — Indian bank default risk rose the most among Asian lenders as mounting bad debts cools euphoria over Prime Minister Narendra Modi’s economic policies.
The cost of insuring against nonpayment leapt 17.7 basis points for Bank of India in the past three months, 15.3 basis points for ICICI Bank and 14.7 basis points for State Bank of India. Those were the biggest increases in credit-default swaps among regional lenders, data compiled by Bloomberg show.
Modi is struggling to bolster loan growth near the weakest since 1994, after stressed assets jumped to 10.7 per cent of total advances last year. Restructured loans at state-run lenders are souring at a record pace, after regulators ruled banks must categorise any lending they reorganise as bad.
“The evolving macro-economic environment doesn’t provide any greenshoots for banks that are reeling under profitability constraints,” said Vibha Batra, New Delhi-based head of financial industry ratings at ICRA.
Bank of India’s chief executive officer B.P. Sharma couldn’t be reached at headquarters in Mumbai. Two calls to State Bank of India’s spokesman M.R. Rekhi went unanswered. There was no immediate response from ICICI Bank to an e-mail seeking a comment.
The local unit of Fitch Ratings estimates the percentage of soured and restructured loans in the banking system will rise to 13 per cent by March 2016, the highest since 2001.
Seeking to clean up bank balance sheets, Reserve Bank of India Governor Raghuram Rajan has proposed penalties and incentives to get lenders to move faster in containing soured debt in an effort to bolster the financial system. The RBI expanded the types of loans that lenders must categorise as bad as of March 31, forcing them to increase provisioning.
Rising bad loans contributed to a 13.5 per cent decline in the MSCI India Financials Index in the past three months. It rose 50 per cent in the previous 12 months after Modi was sworn in last May.
Lower expectations
“Stock-taking that accompanied the one-year anniversary of the Modi administration has led people to realise that a number of reforms are happening but the impact will be felt over time,” said Krishna Hegde, head of Asia credit research at Barclays in Singapore. “Investors have pared back excessively bullish expectations.”
Bank credit has been the missing link as Modi strives to revive growth in Asia’s third-largest economy. Lending increased 10.2 per cent in the 12 months through May 15, after February’s 8.88 per cent, which was the slowest pace since 1994.
The RBI cut its benchmark rate 25 basis points to 7.25 per cent on June 2 after exports dropped for a fifth straight month in April and factory output slowed to a five-month low. That failed to prevent the yield premium over the sovereign for three-year, AAA bonds widening 11.8 basis points from the year’s low in May to 54 basis points.
“It may be that some investors are seeing an inflection point,” said Thomas Drissner, a Singaporebased investment manager at Aberdeen Asset Management. “They may be using the more liquid credit default swaps to express that view.” —
13% rise in soured and restructured loans seen by March 2016, highest since 2001