India’s bad loans problem looks much worse than lenders have been willing to ackn-owledge, heaping pressure on banks’ profits and further tightening the screws on distressed debt that could be bigger
India’s bad loans problem looks much worse than lenders have been willing to ackn-owledge, heaping pressure on banks’ profits and further tightening the screws on distressed debt that could be bigger than New Zealand’s $170 billion economy.
The magnitude of the debt-mess was laid bare in April when two of India’s largest private sector lenders — ICICI Bank and Axis Bank — provided unprecedented guidance on non-performing loans, underscoring repeated warnings by RBI’s governor Raghuram Rajan on the need to clean up banks’ balance sheets.
Axis Bank disclosed it had put Rs 22,600 crore of its loans on a ‘watch list’, and was expecting 60 per cent of those to default within two years. ICICI said some Rs 52,500 crore of loans to struggling sectors including steel and power had been put on watch.
The dangers are clear cut. Increasing provisions to cover rising bad loans are likely to hurt banks’ profits and curb credit growth, stoking a vicious circle of lower economic growth triggering more defaults and choking off business investment and production.
Indeed, banks’ loan growth at 10.7 per cent in the last fiscal year ended March 31, was the slowest in nearly two decades, partly on lower lending to debt-heavy sectors such as iron and steel that account for the lion’s share of bad debt. Profits at most lenders have also taken a hit in the past six months as they set aside a higher sum to cover for defaults after a clean-up exercise ordered by the RBI. “The banks need to keep provision covers high,” said Abhishek Bhattacha-rya, a director at India Ratings and Research. “That all points to the fact that the earnings should continue to be under pressure.”
Mr Bhattacharya estimates about Rs 13 lakh crore ($195 billion), or a fifth, of bank loans are already stressed — bigger than the size of New Zealand’s economy. That compares with Rs 8.06 lakh crore of distressed loans reported as of December or 11.5 per cent of India’s entire bank debt, meaning more pressure on profits.
Dr Rajan, who wants banks to fully disclose and provide for bad debt by March 2017, is calling for “deep surgery” to clean up the balance sheets.
Investors and analysts have long suspected that Indian lenders, especially state-run banks, are not disclosing the true extent of their troubled loans to avoid having to raise provisions.
