Indian banks: How many men and how many boys?

Live Mint : Nov 29 2012. 02 55 PM IST

I hate to say this but it seems that Indian banks, particularly those majority owned by the government, seem to have too many skeletons in their closets. The growth in their restructured assets bears testimony to that.

In the September quarter, the banking industry added Rs.19,544 crore to the kitty of recast loans done through the so-called corporate debt restructuring (CDR) route, taking the pile in the first six months of the year to Rs.37,501 crore—about 10% less than the quantum of bad loans restructured all of fiscal 2012.

Overall, the system has recast Rs.1.9 trillion on the CDR platform that involves majority lenders agreeing to restructure a stressed account when they feel the borrower is a victim of an economic downturn or other external factors over which it has no control. This is done by stretching the loan repayment period, cutting down interest rates and even replacing high-cost rupee loans with relatively low-cost foreign currency loans or a combination of such steps depending on circumstances and the borrower’s profile.

Apart from this, individual banks enter into bilateral agreements with their borrowers to prevent a loan from turning bad if they are convinced that the borrower will be in a position to repay the money after a short reprieve. The amount of loan recast through both these routes could be close to Rs.4 trillion—about 8% of the Indian banking sector’s total loan assets.

Now, add to this Rs.1.67 trillion gross non-performing assets (NPAs) of the banking system (in September) and, by simple arithmetic, at least 11.5% of total banking assets in India is under stress. This is not a happy sign.

Banks are optimistic that most restructured assets will turn good and their borrowers will be able to pay back on time, but that can happen only when the Indian economy gets back to its earlier pace of growth. The growth in India’s gross domestic product fell to a nine-year low of 5.3% in the March quarter, subsequently rising marginally to 5.5% in the June quarter. The story is unlikely to be very different in the next few quarters. We will get to know the September quarter growth figure on Friday.

On the face of it, banks have been aggressively restructuring loans to extend a helping hand to their borrowers. But there is another reason behind this—they want to make their balance sheets look good by keeping non-performing assets (NPAs) low. In other words, they are delaying the inevitable. Gross NPAs have been growing fast. State Bank of India, the nation’s largest lender, had 5.15% gross NPAs in September; ICICI Bank Ltd, the largest private lender and second largest bank overall, 3.54%; andPunjab National Bank , the third largest, 4.66%. The growth in net NPAs has not been that spectacular as banks have been setting aside money for bad assets and even writing off part of them.

In percentage term, bad loans—both gross and net—can also be brought down if a bank’s overall loan book grows at a faster pace but that has not been happening as banks are not aggressive in pursuing loan growth for fear of expanding bad assets. Since they cannot create an optical illusion, it’s time they tightened their credit appraisal and monitoring system.

The regulator has tightened norms for recast assets but only marginally. That alone may not deter banks from stopping the practice of restructuring loans, which is normally done more to protect their balance sheets than helping out corporations.

In good times, every bank makes money but when economic growth slows and the corporate sector is not in the best of health, the men are separated from the boys. We can count them now—there aren’t too many.