RBI data shows that stressed loans in the banking sector crossed $138 billion in June 2016. This represents an increase of about 15 per cent in six months from $121 billion recorded in end-December 2015. This means that banks may take longer than expected to clean up their balance sheets and the March 2017 deadline may be missed. This may also impose huge costs on the banking sector.
Public sector banks (PSBs) accounted for about $122 billion of the total stressed loans as of June, while private sector lenders had $14 billion, according to the central bank data. Local operations of foreign banks had about $2.3 billion in stressed loans.
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.
According to an earlier estimate, more than two dozen PSBs, which account for 88 percent of the bad loans, need $27 billion in new equity capital by March 2019 to meet tougher global banking rules known as “Basel III”. However, the surge in stressed loans means banks need more capital to shore up their balance sheets. These funds will have to be provided by the government since bad balance sheets of PSBs will substantially raise the cost of funds if these are to be mobilised from the market.
According to a Reuters report, bankers have previously said that, while the number of non-performing NPLs kept rising after an asset quality review ordered by the central bank 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. Guha, according to Reuters, estimated NPLs in the current financial year would rise by 35 to 40 per cent. For the state banks it would be much higher, he said.
“The pressure of provisioning is going to be very, very significant,” Guha said. “I won’t be surprised if some of the banks continue to report losses in the coming quarters.”
Most analysts reckon the struggling state-run lenders will need far more than the $10 billion the government plans to inject into them over a four-year period to March 2019.
The government is yet to specifically say if it will raise the cash injection, but Finance Minister Arun Jaitley has said the administration was solidly behind the banks.
As the focus on cleaning up banks has intensified, credit growth has fallen to two-decade lows, threatening economic expansion and investment.
Economic growth slowed to 7.1 percent in the April-to-June quarter, below the 8 percent level seen as necessary to maintain full employment and challenging Modi’s pledge to create 250 million jobs over the next decade.
NPLs as part of the stressed loans total jumped to about $101 billion, from $65 billion in December.
Adding to the banks’ woes, the data shows another Rs. 1.93 lakh crore ($29 billion) worth of loans as of June that was not yet classified as “stressed” but on which borrowers are more than 60 days behind on interest or principal payments, putting those at high risk of becoming NPLs.
The central bank and the government have announced new schemes to tackle stressed assets, albeit with little success yet.
A debt-for-equity swap scheme unveiled by the central bank has found few takers, although a host of foreign investors has this year announced investments in Indian distressed debt after an easing of regulations by the government.
India’s newly-appointed central bank Governor Urjit Patel has said the regulator will deal with the bad loans situation with “with firmness but also with pragmatism”.
Patel’s predecessor Raghuram Rajan, who had ordered the asset quality review and called for a “deep surgery” of the bad loans, had been criticised by some that the excessive focus on clean-up was choking credit growth. ($1 = 66.5919 Indian rupees)