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Business News/ Industry / Banking/  Indian banks without chiefs mean time lost to end loan slump
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Indian banks without chiefs mean time lost to end loan slump

The overhaul threatens to delay executive decisions at the banks, undermining efforts to spur lending and curtail bad loans

Prime Minister Narendra Modi’s administration scrapped the current method of selecting the heads of state-owned financial institutions, after Syndicate Bank chairman S.K. Jain was arrested in August on bribery charges. Photo: BloombergPremium
Prime Minister Narendra Modi’s administration scrapped the current method of selecting the heads of state-owned financial institutions, after Syndicate Bank chairman S.K. Jain was arrested in August on bribery charges. Photo: Bloomberg

Mumbai: Indian banks’ efforts to arrest the worst lending slowdown since 2009 met another hurdle as a government sweep left eight of 26 state lenders without chiefs.

Prime Minister Narendra Modi’s administration scrapped the current method of selecting the heads of state-owned financial institutions, after a senior banker was arrested in August on bribery charges. India will use a new process to choose chairmen for eight lenders, according to an 27 October official statement, including Bank of Baroda, Punjab National Bank and Canara Bank.

The overhaul threatens to delay executive decisions at the banks, undermining policy makers’ efforts to spur lending and curtail bad loans in the country’s economy. The average cost of credit-default swaps insuring the bonds of five lenders has climbed to 174 basis points from a low of 167 on 7 October, according to data provider CMA.

“While the intention is good in overhauling the selection process for bank chairmen, crucial time is being lost," Saswata Guha, Mumbai-based director at Fitch Ratings Ltd., said in a 30 October telephone interview. “A strong management team is a necessity to take on the challenges that state-run banks are up against, such as lower capitalization, higher stressed assets and weaker earnings."

Government-controlled lenders account for almost 76% of outstanding loans in the country, the latest data from the Reserve Bank of India (RBI) shows.

Banker arrested

India scrapped the bank chief selections after federal investigators apprehended the chairman of state-run Syndicate Bank in August, accusing him of accepting bribes in exchange for providing “financial advantages" to companies. They didn’t elaborate. The cancelled appointments were made during the previous government’s term, which ended in May.

“The government would fill up all these vacancies expeditiously," the finance ministry said in the 27 October statement, without specifying a timeframe. The new selection process for senior officials will include consultations with the central bank, according to the government statement.

Loan growth slumped to 9.7% in September, the least since October 2009, amid an economic slowdown and as lenders stepped up efforts to lower bad debt from an eight-year high reached in 2013. While the pace of credit expansion improved to 11% in October, it’s still less than an average 22.3% achieved in the decade through 2013.

‘No one at helm’

The regulatory scrutiny of lending irregularities comes at a time policy makers are pushing to rein in bad debt and strengthen the financial system. RBI governor Raghuram Rajan, who highlighted curbing soured credit as among his priorities when he took charge last year, has spurred banks to improve loan recoveries.

“Investor confidence in the lenders will drop if there is no one at the helm," Hatim Broachwala, Mumbai-based banking analyst at Nirmal Bang Securities Ltd said in a telephone interview on 31 October. “The bad-loan recovery efforts and growth plans will take a back stage when there is no one there to call the shots."

India’s increased efforts to clean up the banking system have had some early success. Non-performing debt as a proportion of total advances fell to 4% as of 31 March from 4.2% in September, which was the highest since 2005-2006, according to the latest RBI figures. Loan recoveries at State Bank of India, the biggest lender, more than doubled in the April-June quarter and tripled at Bank of Baroda, ranked second by assets.

Credit challenge

The credit slowdown is heightening the challenge faced by Prime Minister Modi, who has pledged to revive the economy from the worst slowdown in a decade. Gross domestic product increased 4.7% in the year through March, a pace that’s just above the 10-year low 4.5% in the previous period.

Lending has also cooled as the highest interest rates among Asia’s biggest economies damped demand for credit. RBI governor Rajan raised the repurchase rate three times since he took charge in September 2013 to tame price pressures. He has left the benchmark unchanged at 8 percent since January.

The average yield on five-year AAA rupee corporate bonds is 8.91%, compared with 4.7% in China, according to data compiled by Bloomberg. 10-year government debt pays 8.26% in India, compared with 3.73% in China and 2.66% in South Korea. The rupee weakened 0.1% on Monday to 61.44 per dollar.

The lending slowdown prompted Indian banks to cut deposit rates for the first time in two years. State Bank of India lowered rates on one- to three-year savings by 25 basis points to 8.75% in September, the first reduction since May 2012 in data compiled by Bloomberg. Punjab National Bank reduced deposit rates in October.

The yield on State Bank’s dollar-denominated debt due 2024 has climbed to 4.33% from as low as 4.22% on 14 October, according to prices from Standard Chartered Plc.

“The delay in the bank appointments will come at a cost," Asutosh Kumar Mishra, a Mumbai-based banking analyst at Karvy Stock Broking Ltd, said by phone. “Strategy formulation and implementation suffers when there is a vacuum at the top. The second rung leadership can only manage the day-to-day operations." Bloomberg

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Published: 03 Nov 2014, 11:59 AM IST
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