Bad loans in banks could trigger downgrade

MUMBAI: Bad loans in

banks

could be the weak spot in India’s economy and could risk triggering a future downgrade. Besides the standard risks to the economy arising out of fiscal slippage and from global volatility, Moody’s has cited health of the

banking

system as vulnerability for the economy.

According to Moody’s, recapitalization of PSU banks and proactive steps to resolve bad loans are beginning to address a key weakness in India’s sovereign credit profile. SBI chairman Rajnish Kumar said that large NPA accounts referred to the National Company Law Tribunal in July would come up for resolution in January 2018.

Bankers, however, say that since these are the first transactions the bankruptcy process is likely to get tested. Most bankers feel that bad loans will start declining only from the next financial year. Banks are also reluctant to take more defaulters to the National Company Law Tribunal as regulations require that they make 50% provisions on loans in respect of which bankruptcy proceedings have been initiated. There have been reports that the government may force banks to initiate insolvency proceedings against more borrowers.

Besides having to make high provisions, if banks do not get acceptable bids during the insolvency process, they would be required to initiate liquidation proceedings. If this happens banks might be required to make massive write- down of their loans.

The third uncertainty is over bank mergers. According to market players, investors are reluctant to make big bets on bank stocks over fears that government may decide to merge weak banks with some strong banks. Given that public sector banks do not have the flexibility to clean up their books there is fear that merger with a weak bank would hurt the stronger bank.

“While the capital injection will modestly increase the government’s debt burden in the near term (by about 0.8% of GDP over two years), it should enable banks to move forward with the resolution of NPLs through comprehensive write-downs of impaired loans and increase lending gradually,” Moody’s said.

According to Care Ratings, gross NPAs of 36 top banks have increased from Rs 2.94 lakh crore in March 2015 to Rs 3.32 lakh crore in Sept 2015 and then sharply to Rs 8.38 lakh crore in Sept 2017.

“The next two quarters would be crucial from the point of view of NPAs as it is still not clear whether or not they have been fully recognized and provided for. Private Banks too have witnessed an increase in their NPA ratios and the final picture will emerge by March 2018,” said Madan Sabnavis, chief economist, Care ratings in a report on Friday.

According to Bloomberg data, Indian companies and banks have sold $12.5 billion of foreign-currency bonds so far this year with a fourth of them coming from banks. Bankers said that the upgrade would also draw more investors into these bonds as the earlier rating was the lowest above-investment grade. Many pension funds, which are mandated to invest in only investment-grade securities, avoid bonds that are at the edge of investment grade.

SBI chief economist Soumya Kanti Ghosh said, “The

ratings upgrade

will have a profound impact on bond yields and lift the morose sentiments in the bond market, apart from impacting the movements in the domestic currency. The greatest irony is that despite India’s improved fundamentals, bond yields have moved in a contrarian direction. For example, if we compare India’s bond yield from the levels of 2008, it is highest among select economies. India’s bond yields are around 170 bps higher than the 2008 level.”