Friday, May 18, 2018

India’s bad-loan levels have peaked, says SBI chairman

Banks now demand substantial equity in projects
to keep controlling shareholders engaged

Mumbai, May 18:  The head of India’s biggest bank has declared an end to a protracted, dramatic rise in the sector’s bad loan ratios, which has forced a huge government bailout and sparked fears for the country’s economic outlook.

Indian banks lent enthusiastically to large-scale industrial projects over much of the past decade, only for many big corporate borrowers to struggle with repayments after their projects failed to meet ambitious forecasts.

The banks’ declared bad debts have risen seemingly inexorably over the past two years, reaching $130bn at the end of March, prompting a $32bn recapitalisation plan for the dominant state-controlled banks and weighing on credit growth.

Now, the recognition of bad loans resulting from that rush of lending is effectively complete, Rajnish Kumar, chairman and managing director of State Bank of India, told the Financial Times.

“As far as the recognition part is concerned that is largely over,” said Mr Kumar, whose bank is by far the largest in India with more than $500bn of assets.

New rules issued by the Reserve Bank of India, the central bank, in February— which some in the banking sector described as excessively rigid —  left “little scope for anyone to hide anywhere”, said Mr Kumar. “So that part is over.”

The RBI’s new rules stipulate that if a debt goes unserviced for 180 days, lenders must take action under India’s powerful new bankruptcy code, forcing the sale or liquidation of the company.

This was just the latest stage in a sustained campaign by the RBI, beginning under former governor Raghuram Rajan, to force lenders to disclose the full extent of their distressed assets — and to end the practice of “evergreening”, whereby banks would repeatedly allow borrowers extra time to repay their debts.

Vital lessons had been learnt from the surge in non-performing loans in sectors such as steel and infrastructure, said Mr Kumar, who spent 27 years at SBI before becoming its chairman in October.

“When the funding for the projects came into the sector eight or nine years ago, we all thought it was a great opportunity for us,” he said. “But honestly we did not realise there are so many pitfalls.”

In particular, Mr Kumar said, banks were now insisting that company “promoters”, or controlling shareholders, put substantial equity into new projects, rather than relying excessively on bank credit.

“Now, when we underwrite any credit, the equity from the promoters [is] being looked into in much more detail,” he said. “We want promoters to be in the game.”

State-run banks by far saw the biggest rise in bad loans, which comprised 13 per cent of their outstanding lending as at the end of December, according to Credit Suisse.

The banks’ problems with asset quality — combined with the concerns raised by an alleged $2bn fraud at Punjab National Bank, one of the biggest lenders — has prompted growing debate over whether the government should privatise the banks, which were nationalised by then prime minister Indira Gandhi in 1969.

Mr Kumar argued that India’s development requirements meant it would need government banks for another two decades to perform important but low-margin work such as extending financial services to the rural poor.

“If we can develop the country in the next 20 years, then the need for state ownership to push development will be less,” he said.

Sri Karthik Velamakanni, an analyst at Investec, said further increases to the default figures could still potentially come from “nagging pain points in the economy” such as construction and power.

The state banks’ weak capital situation was threatening their ability to ramp up their lending to the economy, he added. “There will be a long and painful road ahead.”

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