Home / Industry / Bank default risk jumps as bad loans cool Modi euphoria

Singapore/Mumbai: Indian bank default risk rose the most among Asian lenders as mounting bad debts cools euphoria over Prime Minister Narendra Modi’s economic policies.

The cost of insuring against non-payment leapt 17.5 basis points for Bank of India in the past three months, 15 basis points for ICICI Bank Ltd and 14.5 basis points for State Bank of India. Those were the biggest increases in credit-default swaps among regional lenders, data compiled by Bloomberg show.

Modi is struggling to bolster loan growth near the weakest since 1994, after stressed assets jumped to 10.7% of total advances last year. Restructured loans at state-run lenders are souring at a record pace, after regulators ruled banks must categorize any lending they reorganize as bad.

“The evolving macro-economic environment doesn’t provide any greenshoots for banks that are reeling under profitability constraints," said Vibha Batra, New Delhi-based head of financial industry ratings at Icra Ltd.

Soured debt

Bank of India’s chief executive officer (CEO) B.P. Sharma couldn’t be reached at headquarters in Mumbai. Two calls to State Bank of India’s spokesman M.R. Rekhi went unanswered. There was no immediate response from ICICI Bank to an e-mail seeking a comment.

The local unit of Fitch Ratings estimates the percentage of soured and restructured loans in the banking system will rise to 13% by March 2016, the highest since 2001.

Seeking to clean up bank balance sheets, Reserve Bank of India (RBI) governor Raghuram Rajan has proposed penalties and incentives to get lenders to move faster in containing soured debt in an effort to bolster the financial system. The RBI expanded the types of loans that lenders must categorize as bad as of 31 March, forcing them to increase provisioning.

Rising bad loans contributed to a 13% decline in the MSCI India Financial Index in the past three months. It rose 50% in the previous twelve months after Modi was sworn in last May.

Lower expectations

“Stock-taking that accompanied the one-year anniversary of the Modi administration has led people to realize that a number of reforms are happening but the impact will be felt over time," said Krishna Hegde, head of Asia credit research at Barclays Plc in Singapore. “Investors have pared back excessively bullish expectations."

Bank credit has been the missing link as Modi strives to revive growth in Asia’s third-largest economy. Lending increased 10.2% in the 12 months through 15 May, after February’s 8.88%, which was the slowest pace since 1994.

The RBI cut its benchmark rate 25 basis points to 7.25% on 2 June after exports dropped for a fifth straight month in April and factory output slowed to a five-month low. That failed to prevent the yield premium over the sovereign for three-year, AAA bonds widening 17.5 basis points from the year’s low in May to 59.7 basis points.

“It may be that some investors are seeing an inflection point," said Thomas Drissner, a Singapore-based investment manager at Aberdeen Asset Management Plc, which managed $491 billion as of 31 March. “They may be using the more liquid credit default swaps to express that view." Bloomberg

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