Mumbai: Some of the largest Indian banks are starting to feel the heat from the prolonged weakness in global economies, which has led to an increase in bad loans in their overseas portfolios and prompted them to recast loans that are on the verge of turning bad.
State Bank of India (SBI), the nation’s largest lender by assets, and its public sector peers Bank of Baroda (BoB) and Bank of India (BoI), among others, are witnessing a rise in their non-performing assets (NPAs) overseas.
Banks are treading cautiously in expanding overseas business as the US struggles for recovery, Europe battles its debt woes and the rest of the world feels the double impact. The increase in bad loans hasn’t reached alarming levels yet, but can take a turn for the worse if the slowdown in world economies persists, analysts say.
It’s bad news for India’s banks, especially those in the public sector, which have seen bad debt pile up in their domestic portfolios as slowing economic growth and high interest rates make it more difficult for customers to repay loans.
The stress in overseas portfolios is visible more in banks’ exposure to consumer-driven sectors such as tourism and real estate, and some corporate segments.
SBI has added about $15 million (around Rs.80 crore today) of fresh bad loans to its overseas loan book in the last six months. It has also restructured about $20 million worth of loans, said Hemant Contractor, SBI’s managing director in charge of international operations. Most such loans were given to hotels and resorts in countries such as Mauritius, he said.
The numbers may not be big in absolute terms, but they are significant. SBI’s total exposure to tourism is about $150 million.
“There has been a rise in the bad loans given to tourism segment since June. We have identified most of the cases and have taken necessary actions, including seeking legal recourse in some cases,” Contractor said.
He declined to divulge NPA figures as the lender is yet to announce its third quarter results.
But a senior SBI official, who declined to be named, said the bank’s gross NPAs in its overseas books must have spiked to 1.8% in the December quarter from about 1.4% in the year-ago period.
SBI’s net NPAs from international business rose to Rs.1,294 crore in the September quarter from Rs.948 crore in the year-ago period. It had an overseas loan book of Rs.1.25 trillion as of September.
Other public sector banks that have operations abroad such as BoB, BoI and Punjab National Bank (PNB), too, have witnessed overseas NPAs rising in the past one year.
BoB, which has an overseas loan book of about Rs.95,000 crore, saw its gross NPA ratio rising to 0.73% in the December quarter from 0.69% a year ago.
Cumulatively, the bank restructured 89 accounts in its overseas operations involving Rs.4,725 crore. Out of these accounts restructured in April-December, there were 20 involving a combined amount of Rs.1,069 crore.
In the case of BoI, another lender with significant overseas operations, bad debt rose sharply in the December quarter to Rs.14,140 crore from Rs.7,943 crore a year ago, making up 16.4% of the total bad loans. In the third quarter, the bank’s gross NPAs rose to 3.08% of its total loan book, from 2.74% a year ago.
“The major hit came in the September quarter because of a particular stressed account; this quarter the situation in the overseas accounts is better,” BoI’s executive director N. Seshadri said while announcing the third quarter earnings last week. He did not elaborate on it.
K.R. Kamath, chairman of PNB, said the bank is not too worried because it does not have significant exposure abroad. “There is some slowdown in the credit pick-up on the corporate loan book. But there is no major concern as we do not have major overseas exposure,” he said.
Slowing demand from consumers has also had an impact on SBI’s aggressive expansion plans in overseas retail banking. It is now going slow on its retail business and, instead, is focusing on high-yielding corporate loans. In 2009, SBI had chalked out strategies to expand its retail business in countries such as Singapore, the UK and Canada. But the plan is yet to take off and the bank is focusing on corporate banking linked to Indian companies and trade finance, Contactor said.
Contractor is still bullish on SBI’s overseas business, which currently contributes 14-15% of net profit. It plans to set up its sixth subsidiary in Botswana and a full-service branch in Tianjin in China.
SBI has five subsidiaries in Indonesia, Mauritius, Nepal, California and Canada.
“The movement on asset quality of Indian banks in their international books is a reflection of what is happening in the domestic market as most of the loans are given to Indian corporates,” said V. Sri Karthik, an analyst at Espirito Santo Securities India Pvt. Ltd.
The overall bad loan burden of the Indian banking industry has risen sharply in the past one year. Gross NPAs of 40 listed banks rose 46.85% to Rs.1.67 trillion in the September quarter from Rs.1.14 trillion in the year-ago period.
SBI had bad loans equivalent to 5.15% of the total loan book in September 2012. Central Bank of India (5.64% in December), UCO Bank (5.53% in December) and PNB (4.61% in December) are other lenders that have reported a significant rise in bad loans.
The banking industry is witnessing a sharp increase in restructured assets, which have reached about Rs.4 trillion, and analysts estimate that 25-30% of these loans may turn bad.