Monday, December 08, 2014

SBI loan to Adanis: Sharp rise in non-performing debts of public sector banks "pulling down" India's growth rate

By Our Representative
Even as the State Bank of India has said that it would take a final call for the “controversial” decision on Rs 6,200 crore (USD 1 billion) loan to Adani Group in the next couple of months or so in order to fund its costly Australian mining project, already rejected by several of the banks abroad, the prestigious British weekly “Economist”(December 6) has pointed towards how the non-performing debts of India’s powerful public sector banks have risen to disturbing proportions, and may hit India’s overall growth rate.
The “Economist” says, though “India has been lucky” – as, struggling to contain inflation, the weaker prices for its imports, most notably oil, has come as “boost” – this has failed to provide the necessary boost.“There is concern about a recent loss of momentum in the economy. Figures published on November 28 showed GDP growth slipping to 5.3% in the year ending in September. Investment was especially weak. Credit growth has been feeble”, it adds.
It underlines, “The main cause of both is not the level of interest rates but an overhang of debt. Indian firms are heavier borrowers, measured by debt-to-equity ratios, than those in any other emerging market bar Brazil, according to a recent analysis by the International Monetary Fund. The worry is that banks will not be able to fund fresh investment because they are weighed down by dud loans.”
Arguing, in this context, in favour of reducing its stakes in the public sector banks in order to fight bad debts, the “Economist” says, “The government, which is battling to contain a budget deficit, has said it will raise capital for public-sector banks by further reducing its stake in them to 52%.” Insisting that there is an urgent “need to do more”, the journal says, “Without well capitalised banks, India will not be able to reach the faster growth rate the government has promised.”
Pointing towards what is ailing the public sector banks, the “Economist”, without naming the big loan offered to the Adanis by State Bank of India, underlines, “Most of India’s private debt is owed by companies”. Sauing that his has been the main reason behind rising “incidence of non-performing loans”, it comments, “Including ‘restructured assets’, loans whose terms have been rejigged to make payment easier, troubled assets are 10% of all lending. The problem is bigger among public-sector banks, which account for more than 70% of the loan stock.”
The “Economist” further says, “Around 15% of restructured loans typically turn bad in India. But in the aftermath of an investment boom, such as the one the country enjoyed until 2012, the rate at which such loans sour again may prove to be higher than that.” Quoting analysts at Credit Suisse, a brokerage, the journal says, “A third of the debt in its sample of 3,700 listed companies is held by firms that paid more in interest than they earned in the past quarter. Many debt-ridden firms had no earnings at all.”
Especially pointing towards where the problem is particularly evident, the journal says, “Much of the trouble lies with infrastructure, power and metal companies that invested heavily in the go-go years. Some completed projects lie idle waiting for officials to sign off on an all-important detail—allowing a power station to procure coal from a particular mine, for instance.” The problem has been further aggravated with the Supreme Court cancelling “more than 200 coal-mining licences it said had been sold unfairly”, and this has “put $40 billion of debt at risk.”
Referring to Union finance minister Arun Jaitley’s assessment that India’s banks would need $40 billion (2% of GDP) of fresh capital by 2018 to comply with international regulations”, the “Economist” further quotes Credit Suisse analysts to argue that “up to $45 billion more will be needed to fill the hole left by bad debts.”

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