Indian banking started this fiscal year in a crisis caused by a pile-up of bad loans. It is closing the year in the same way. Asset quality has worsened, and there is no resolution to stressed assets despite tweaks by the Reserve Bank of India to its debt restructuring schemes. State-owned banks are the worst hit, with losses piling up and a lack of capital.
Credit growth has slowed to a trickle and bonds have been the largest incremental source of funding for corporate entities for the second straight year. The silver lining: finance minister Arun Jaitley has held out an assurance that the government is working on a radical proposal to solve the asset quality crisis. A new policy is expected to be announced at the end of this fiscal year or early next year.
Mounting bad loans
Gross non-performing assets (NPAs) have more than doubled in 24 months. If restructured assets are added, the total would come close to Rs10 trillion. State-owned banks account for the lion’s share of these bad loans. Credit rating agencies have warned that this number will worsen before it gets better.
Rising bad loan levels have forced banks to set aside more money to cover the risk of default, eroding profitability, particularly for state-owned banks. Collectively, state-owned banks have made losses for five quarters in a row. Analysts don’t expect the current quarter to be any better.
Declining credit growth
Another reason why a recovery looks far away is declining credit growth, which has fallen to a 30-year low. Not only are banks hesitant to lend, there isn’t much demand for corporate credit because private investment demand is still languishing, thanks to low capacity utilization.
Lack of capital
Even if investment demand bounces back, bank lending might not, due to capital constraints. Many mid-level state-owned banks are just above the mandatory Basel-III capital adequacy limits. Support from the government is also not forthcoming; it has set aside just Rs70,000 crore for equity infusion from fiscal 2016-2019, a fraction of the Rs4 trillion that is required, according to rating agencies’ estimates.
Graphics by Sarvesh Kumar Sharma/Mint.
Data sources: Capitaline, Bloomberg