Bad
loans add stress to India's
banks By Kunal Kumar Kundu
India's economic slowdown and high
interest rates have started to impact the health
of the country's banks in no uncertain terms, as
is reflected by the rise in non-performing assets
(NPAs) levels.
Source:
RBI
As the Reserve Bank of India data
shows, the gross NPAs of the Indian banking system
(as a percentage of gross advance) during the
fiscal year that ended in March 2012 (FY12) were
the highest in the last six years.
An even
bigger concern is the rising threat of loans
getting restructured as high inflation and
interest rates impact demand and reduce the
pricing power of the corporates. FY12 saw a
massive spurt in
restructured loans, both at an absolute level and
as a share total loan, as corporate cash flows
have been affected drastically.
Source: RBI
Restructured loans
refer to those that cannot be recovered or
serviced as per their schedule and the lenders
are, therefore, required to dilute the terms under
which the loans were originally sanctioned, which
may include lowering of interest rates, extension
of tenure or both.
Under the so called
Corporate Debt Restructuring (CDR) scheme, banks
can restructure loans jointly. When interest
payment becomes overdue for three consecutive
months, the outstanding loan gets classified as an
NPA.
From April 2012 onwards, Indian banks
are required to report their NPAs in a
computer-recognized / identified format. As per
the available information, nearly 90% of all
banks' loan portfolios are under the computerized
system of NPA reporting or system-based reporting.
With the discretion of bank managers in
classifying assets according to their own judgment
being removed, there is less probability of window
dressing and hence, technically, the probability
of a loan being classified is higher, or
better-performing, than it is.
While it
may lead to a spike in NPA numbers, this is a step
in the right direction as it is likely to be more
transparent (though this will not necessarily mean
that all NPAs will get reported, as bank managers
can collude with lenders and coax them to make
payment for a month within the relevant
three-month period and thereby prevent the loan
from being classified as an NPA).
According to the International Monetary
Fund Research Department's Corporate Vulnerability
Utility database, debt-to-equity ratios now exceed
100% in Brazil, India, and South Korea (based on
the capital-weighted mean of corporate
debt-to-equity ratio - all sectors). High leverage
and declining profitability raise the probability
of corporate defaults in a downturn.
With
the Indian economy continuing to slowdown (the
gross domestic product growth for FY13 is widely
expected to be sub-6%), NPAs are clearly on the
rise.
As on June 30, the total amount of
loans (on a cumulative basis) restructured by
Indian banks under the corporate debt
restructuring mechanism was close to 1.7 trillion
rupees (US$24 billion) - an increase of 180
billion rupees during the quarter under
consideration.
By July, the number of
cases referred to CDR was even higher. According
to a report by www.moneycontrol.com, in July alone
there were additions of 19 cases amounting to an
additional 115 billion rupees.
While not
all restructured loans end up being NPA, the
threat of rising NPAs is very real, as at least a
quarter of restructured loans can end up being
NPAs. The government-owned State Bank of India
(SBI), the country's largest lender, has
restructured loans worth about 330 billion rupees,
out of which 70 billion rupees have turned into
NPAs.
According to their chairman, Diwakar
Gupta, SBI added 20 billion rupees of restructured
loans in the March quarter, 5.64 billion rupees in
the June quarter and expect to restructure another
50 billion rupees worth of loans during the
remaining part of the current fiscal year.
According to estimates made by India's
leading credit rating agency, CRISIL, the volume
of loans that will be restructured during FY13 may
rise 71% to 2.05 trillion rupees from 1.2 trillion
rupees during FY12. This means that approximately
5.7% of India's total bank loans will have been
restructured over the two-year period.
More importantly, according to an RBI
report, even with easier terms the borrowers have
failed to make payments on 15% of these loans
since 2009. The report further states that, the
existing guidelines allow banks to restructure
loans for debtors who don't have viable plans to
bolster cash flow, thereby delaying the inevitable
collapse.
As the economy slows, credit
conditions worsen and companies struggle to raise
cash from the stock markets, the probability of
default can only be higher. From the point of view
of the banks, restructuring will lead to an
increased cost of credit as they will need to set
aside a higher percentage of the original loan
amount, unlike in the case of the original loan.
As of now, while the provisioning
requirement for the original loan is around 0.4%,
the requirement for a restructured loan goes up to
2%, and the RBI is planning to increase the
provisioning requirement to 5%.
Most of
the restructuring belongs to risky sectors such as
power, telecoms, textiles etcetera. These three
sectors alone account for 30% of total loans
currently.
Source: RBI,
author's calculation
The problem is,
most of the restructured loans belong to the
state-owned banks. As per the estimates made by
The Economist, 93% of restructured loans are part
of loan portfolio of the state-owned banks.
India's commerce minister recently talked
about restructuring loans to the textile sector to
the tune of 350 billion rupees. Then there is debt
restructuring of the ailing state electricity
boards. And the story continues.
In fact,
forced debt restructuring of many loss-making
public-sector units is standard practice, which
allows the bankers to classify their loans as
standard, thereby increasing the risk of
impairment of assets in the future.
Decisions by the policy makers to seek
restructuring of loans as a solution to the
problems faced by industries (unable as they are
to address the basic concerns of the industry) can
only come at the cost of the health of the banking
sector, especially the state-owned banks, which
are more prone to arm-twisting.
This is
also evident from the fact that while India's
small-scale industries are the worst affected due
to credit lines drying up because of high rates
and stricter lending norms, political pressure
(with an eye toward various forthcoming elections)
has resulted in priority lending to the
agriculture sector increasing by leaps and bounds,
even though this sector is suffering due to recent
drought conditions.
Source: RBI, author's calculation
Clearly, rampant and politically motivated
restructuring of loans induced by a slowing
economy is increasing the vulnerability of India's
banking sector even if, for the time being, it is
not under imminent threat of collapse.
Kunal Kumar Kundu is Senior
Economist, RGE India. The views expressed are
those of the author.
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