Mumbai: Bank bond risk in India is poised for the longest run of declines on record and Fitch Ratings says the nation’s move to almost double the cash lenders must set aside to cover troubled loans will further bolster confidence.
Reserve Bank of India (RBI) governor D. Subbarao ordered banks to boost reserves against restructured debt to 5% from 2.75%, according to a 30 May statement. The cost to insure the debt of State Bank of India (SBI), the country’s largest, fell 22 basis points since 31 March to 189, set for a fourth quarterly slide, according to data provider CMA.
India is stepping up efforts to shield its financial system from loan defaults after the slowest economic growth in a decade as Asia’s highest funding costs forced companies including Kingfisher Airlines Ltd to delay repaying liabilities. Tighter regulations will prompt banks to adopt more stringent lending practices, helping rein in increases in bad debt, according to Fitch Ratings and the local unit of Moody’s Investors Service.
“This step by the central bank is in the right direction,” Saswata Guha, a Mumbai-based director at Fitch, said in a 31 May telephone interview. “This should bring about a positive change in the way in which lending is done in India. Lenders will take appraisal of projects more seriously and will monitor disbursed loans in a more disciplined manner now.”
RBI’s Subbarao is tightening regulations to shore up banks’ asset quality after non-performing debt as a proportion of total lending rose to 3.7% in December, the highest in at least five years, according to central bank data. In April, Prime Minister Manmohan Singh’s government directed state-run lenders to slash gross bad loans to 1% of total assets by March 2014 from 4.1% in September.
While lenders must set aside a cash cover equivalent to 5% for newly restructured credit from 1 June, provisions for previously renegotiated loans will increase only in stages. Such risk buffer would rise to 3.5% by March 2014, 4.25% by a year later and 5% by the end of 2015-2016, according to the monetary authority’s statement. The plan gives financial institutions adequate time to meet the requirements, according to Icra Ltd, the Indian unit of Moody’s.
“These final rules are more benign on banks than the draft guidelines published earlier,” Vibha Batra, New Delhi-based senior vice-president at Icra, said in a telephone interview on 31 May. “Banks will be able to absorb the additional provisions without difficulty as they set in in a staggered manner. They will be more careful while assessing viability of projects.”
Restructured loans, which give companies a moratorium on payments, longer maturities or lower interest rates to avoid defaults, more than doubled in the year ended March 2012 to Rs.2.2 trillion, according to Moody’s. Government-controlled SBI posted a 19% decline in profits for the three months ended March as provisions for soured assets rose.
Loans renegotiated by firms including those to wind-turbine maker Suzlon Energy Ltd, which defaulted on bond payments in 2012, totaled Rs.2.29 trillion on 31 March, up 65% from a year earlier, according to data from the Corporate Debt Restructuring Mechanism, formed by India’s biggest banks. An additional Rs.32,000 crore worth of liabilities were in the final stages of restructuring, the data show.
The average cost of insuring the debt of five Indian lenders against non-payment for five years using credit-default swaps slid 37 basis points in January to 217 on Monday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.
“The worst is over as far as bad loans are concerned,” Pratip Chaudhuri, Mumbai-based chairman at SBI, said in an interview broadcast on Bloomberg TV India on Monday.
Businesses in Asia’s third-largest economy borrowed Rs.7.8 trillion from banks in the financial year ended March, after raising Rs.6.7 trillion in the previous period, central bank data show.
The most aggressive monetary easing by the Indian central bank since 2009 is reducing borrowing costs for local companies, boosting their ability to repay debt. Governor Subbarao cut the repurchase rate by 75 basis points, or 0.75 percentage point, since 31 December to 7.25%. That pushed the yield on 10-year AAA corporate bonds by 107 basis points to 8%, and that on similar-maturity sovereign notes by 80 basis points to 7.25%, according to data compiled by Bloomberg.
The yield on the 9.95% notes due 2026 of SBI slid 78 basis points in 2013 to 8.46%, prices from the Fixed Income Money Market and Derivatives Association of India show. The rate on Bank of China’s 2020 debt climbed 31 basis points to 3.82%.
Declining borrowing costs will help rein in debt risk for Indian companies, the local unit of Standard and Poor’s said in April. Rating upgrades as a proportion of downgrades at S&P’s Crisil Ltd decreased only 6% in the six months to 31 March, after a 27% tumble in the previous period, signaling a decline in firms’ ability to repay borrowings is near its end, according to the credit assessor.
Easier funding availability is spurring record issuance of corporate bonds in India. Local businesses sold Rs.1.08 trillion of debt in 2013, 18% more than a year earlier.
“The pressure on borrowers has eased following the fall in interest rates over the last few months and therefore it is not unreasonable to believe that the bad-loan situation will show considerable improvement,” M. Narendra, chairman and managing director at Chennai-based Indian Overseas Bank, said in a phone interview on Monday. “The central bank has taken steps to check bad debt and that should help shore up asset quality in coming quarters.”