Banking ordinance, a better plumber for ICICI Bank’s bad loans

The government’s ordinance amending banking regulations—presumably to give the RBI greater powers to fix the NPA problem—will help ICICI’s bad loans


On Thursday, investors rewarded ICICI Bank’s freshly revealed bad-loan pile of Rs42,500 crore—twice as large as the end-2015 stock—by pushing the shares up as much as 9%. Photo: Abhijit Bhatlekar/Mint
On Thursday, investors rewarded ICICI Bank’s freshly revealed bad-loan pile of Rs42,500 crore—twice as large as the end-2015 stock—by pushing the shares up as much as 9%. Photo: Abhijit Bhatlekar/Mint

The plumber who’ll sort out India’s bad-loan mess is about to get powerful new tools, and an overflowing toilet will soon be clean. Or that’s how investors are reacting to weaker-than-expected quarterly earnings from the country’s largest private-sector bank by assets.

How sentiment changes. At the end of 2015, when concerns over Indian lenders’ balance sheets reigned supreme, ICICI Bank Ltd had around Rs21,400 crore in gross non-performing assets. The bank announced a 78% jump in NPAs for just the first three months of 2016, and shell-shocked investors pushed the stock down almost 10% in three days.

That was last May. Fast-forward a year, and investors rewarded ICICI Bank’s freshly revealed bad-loan pile of Rs42,500 crore—twice as large as the end-2015 stock—by pushing the shares up as much as 9% Thursday.

Also read: RBI to deal directly with loan defaulters after Banking Regulation Act changes

The Indian government’s decision late Wednesday to rush through an ordinance amending banking regulations—presumably to give the Reserve Bank of India (RBI) greater powers to fix the $180 billion stressed-asset problem—has made all the difference.

In the absence of details, though, it may be unwise to get too optimistic.

When he launched a special review of lenders’ asset quality in 2015, then RBI governor Raghuram Rajan promised “clean and fully provisioned” bank balance sheets by March 2017. That deadline, like Rajan, has come and gone, and the toilet is getting dirtier. Nothing that Rajan or his successor Urjit Patel have done to stanch the overflow, including letting the banks exchange soured loans for controlling equity stakes, has worked.

What difference will another new wrench make?

To put this in perspective, ICICI’s soured credit is now $500 million greater than the $6.1 billion heap of dud loans at Standard Chartered Plc, which operates worldwide and has almost three times as large a balance sheet as the Indian lender. Worse, the loan-loss cover for ICICI’s $6.6 billion in bad loans is less than $2.7 billion; StanChart’s cushion is almost $700 million thicker.

ICICI and its smaller rivals like Axis Bank Ltd, IndusInd Bank Ltd and Yes Bank Ltd have blamed their lousy March quarter results on one large account. Once Jaiprakash Associates Ltd concludes the sale of its cement assets to billionaire Kumar Mangalam Birla, the builder of India’s sole Formula One track will be able to repay creditors.

Setting that aside, the banks say, the correct gauge is this: With each passing quarter, fewer new loans are turning bad. And let a bad bank take care of the stress that’s already accumulated.

Gadfly has previously argued that a state-sponsored bad bank would be a mistake. As for giving the central bank more powers, the only stick it needs to be able to wield is one that would force lenders to dispose of their soured assets at prices that make sense to asset-reconstruction companies. Those deals are simply not happening.

Last quarter, ICICI managed to offload less than $4 million of bad debt, and another $90 million of special-mention loans. And this at a private-sector lender, which has more latitude for commercial decisions than state-run banks. The latter, which dominate the industry, would be faulted for taxpayer losses if they sold a loan at 30 cents to a private-equity investor who could then get 60 cents out of it.

Besides, with insufficient profits on good loans to offset losses on the sale of bad ones, India’s state-run banks could need more money from taxpayers. That’s a big ask: The government has been stingy on recapitalization, and may be even more so in the last two years of its term as it pumps cash into voter-friendly programs.

It’s up to the central bank now. If those new tools turn out to be inadequate to fix the leak, the overflow of bad assets will start to look like a deluge. Bloomberg

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