BackToo early to cheer Moody’s banking system upgrade
Bad loan ratios remain elevated for many mid-level state-owned banks and refinancing of loans under the 5:25 scheme red flags continuing stress levels
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Several state-owned banks’ shares rallied on Monday after a thumbs-up from Moody’s. The credit rating agency revised its outlook for the industry to stable from negative, citing a gradual improvement in the operating environment.
It is true the September quarter numbers for many state-owned banks showed asset quality hasn’t deteriorated further. However, bad loan ratios remain elevated for many mid-level state-owned banks and refinancing of loans under the so-called 5:25 scheme red flags continuing stress levels in some industries.
Many of these banks continue to have huge exposure to industries such as iron and steel and infrastructure, which remain shaky. Moreover, these banks have also a huge pile of recast loans. Oriental Bank of Commerce, for instance, has 10% of its loan book restructured. Typically, there is a one in three chance that a recast loan would turn bad.
In a 21 October note, Credit Suisse analysts argued total stressed loans for Indian banks may actually be around 17% against the reported number of 11% in the March quarter. With rural distress and an absence of investment spending adding to corporate India’s woes, there is no quick resolution for these recast loans in sight.
Two other factors continue to haunt state-owned banks. First, capital adequacy remains low for most. For Oriental Bank of Commerce, Indian Bank and Syndicate Bank, capital adequacy ratio is slightly above 10%. Given the amount of stressed assets, these levels may not be enough.
With competition from private banks and larger state-owned peers, these mid-sized banks may not get the desired valuation if they decide to raise money from the capital markets.
To be sure, the government has said it will infuse capital worth ₹ 70,000 crore over four years. But there will be increasing competition for these funds which already look sparse and the government has said it will only give money to eligible banks. So, even if they get it, this kind of capital won’t be enough to fuel decent credit growth.
Competition will only increase after the Reserve Bank of India handed out 23 permits for small and payments banks recently. It will put further pressure on deposits. A tie-up with some of these new banks or consolidation among state-owned lenders might be the way forward.
The writer does not own shares in the above-mentioned companies.
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