Growth in bad loan to delay bank cleanup

Central bank data shows that stressed loans have crossed $138 billion in June.

Stressed loans in India's banking sector crossed $138 billion in June, central bank data reviewed by Reuters shows, an increase of nearly 15 percent in just six months that suggests a state clean-up effort will take longer and cost more than expected.

Fixing the mountain of bad debt weighing down India’s banks is vital for Prime Minister Narendra Modi's government to revive weak credit and investment growth and put a faltering recovery in Asia’s third largest economy on a firmer footing.

The Reserve Bank of India (RBI) has set a March deadline for banks to fully reveal problem loans on their books. When lenders disclose bad loans, they need to take writedowns that hit their bottom line and eat into equity.

The latest data obtained by Reuters through a right-to-information request showed stressed loans rose to 9.22 trillion rupees ($138.5 billion) as at end-June, from 8.06 trillion rupees ($121 billion) in December.

The end-December $121 billion figure has been cited by the government and bankers as the peak of stressed assets in the banking sector.

Stressed assets include both non-performing loans (NPLs) - defined as those that have not been serviced for 90 or more days - and restructured or rolled over loans, where banks have eased interest rates or the repayment period.

India's nearly two dozen state banks, which dominate the sector and account for 88 percent of the bad loans, already need $27 billion in new equity capital by March 2019 to meet tougher global banking rules known as “Basel III”.

The surge in stressed loans will mean banks need even more cash to shore up their balance sheets - funds that will have to come from the government as their ability to raise money through stock or bond sales is constrained by low profits and poor valuations.

State-run lenders accounted for about $122 billion of the total stressed loans as of June, while private sector lenders had $14 billion, according to RBI data. Local operations of foreign banks had about $2.3 billion in stressed loans.

Bankers have previously said that, while the number of non-performing NPLs kept rising after an asset quality review ordered by the RBI earlier this year, the overall number of stressed loans was not going up - instead, loans earlier restructured were falling into the NPL category.

The numbers obtained by Reuters, however, show the overall number of stressed assets continuing to rise.

"The impression we have is that the numbers are certainly going to go up," said Saswata Guha, a director at Fitch Ratings, which estimates Indian banks' total capital requirement to be as much as $90 billion through March 2019, with state banks accounting for the bulk of it.