BREAKINGVIEWS-Indian banks teeter on asset-quality abyss

Tue Aug 13, 2013 10:18am IST

Stocks

   

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Andy Mukherjee

SINGAPORE, Aug 13 (Reuters Breakingviews) - India's banks are staring into an abyss. Loans are souring rapidly as the economy stalls. Meanwhile, rising bond yields are making it harder for lenders to absorb credit losses from current earnings.

State Bank of India shares fell 3.4 percent in Mumbai on Aug. 12 after surging bad loans at the country's largest lender triggered a 14 percent fall in its quarterly net income. But SBI is hardly alone. Gross non-performing assets at India's top 10 government-owned banks have doubled in the past two years to 1.4 trillion rupees ($24 billion) - or 4.4 percent of the total - according to a Breakingviews analysis. (See graphic: link.reuters.com/quz32v) Provisions that banks have already set aside will cover about half the bad loans, but clearing the remaining debris - which is swelling by the day - would wipe out one year of operating income.

Even if banks were willing to bite the bullet, they may no longer be able to. The rise in 10-year government bond yields since May will leave lenders which own a big chunk of New Delhi's IOUs with mark-to-market losses. At the same time, the Indian central bank's recent monetary-tightening efforts, designed to stem the 12 percent slide in the rupee since the end of April, have sent the yield on three-month treasury bills soaring to 10.9 percent, compared with 8.3 percent on 10-year government bonds. The longer that banks face high short-term funding costs without an increase in long-term lending rates, the more their earnings will be undermined.

Nor can banks hope to bulk up their loan books in a slowing economy. That puts the ball in the government's court. Without a recapitalization of state-controlled lenders, the risk is that the clogged arteries of credit won't reopen. But New Delhi, under pressure to reduce its budget deficit, doesn't have the money for a cleanup.

Private investors can't be expected to come to the rescue, either: the Bombay Stock Exchange Banking Index has slumped by 27 percent since May 17, outpacing an 11 percent drop in the broader stock market. In its quest to rescue the rupee, the central bank has pushed an already-wobbly financial system closer to the edge of a precipice.

CONTEXT NEWS

- State Bank of India shares dropped 3.4 percent in Mumbai on August 12, after the country's largest lender by assets announced a 14 percent year-on-year fall in net income in the quarter ended June.

- SBI made loan loss provisions of about 23 billion rupees ($370 million), or about 30 percent of its operating profit during the quarter, as gross non-performing assets jumped to 5.56 percent of total assets, compared with 4.75 percent three months earlier.

- Including SBI, gross non-performing assets at India's top 10 government-owned banks now account for 4.4 percent of total assets, compared with just 2.4 percent in March 2011, according to a Breakingviews analysis of quarterly earnings reports.

- Reuters: Bad loans to shackle Indian state banks 2013/14 profits

- Graphic: Indian banks' ballooning credit losses: link.reuters.com/quz32v

RELATED COLUMNS

Botched defence

Crisis man

- For previous columns by the author, Reuters customers can click on

(Editing by Peter Thal Larsen and Katrina Hamlin)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared
People walk in the Wipro campus in Bangalore June 23, 2009. REUTERS/Punit Paranjpe/Files

Wipro Q4 net profit beats estimates, rises 29 percent

Wipro posted a 29 percent rise in its fourth-quarter net profit, beating expectations, helped by increased IT spending by its customers. For the quarter ended March 31, the company said it earned 22.27 billion rupees compared with 17.29 billion rupees a year earlier.  Full Article | Full Coverage 

REUTERS SHOWCASE

Literary Giant Dies

Literary Giant Dies

Nobel winner Garcia Marquez, master of magical realism, dies at 87.  Read 

Election 2014

Election 2014

India holds biggest day of voting with BJP gaining strength  Full Article | Full Coverage 

Insider Trading

Insider Trading

Ex-Goldman director Gupta starts prison term on June 17.  Full Article 

Market Eye

Market Eye

Sensex jumps 351 points, snaps 3-day losing streak  Full Article 

Expansion Plans

Expansion Plans

Reliance Industries, HPCL Mittal plan refinery expansions.  Full Article 

S&P on India

S&P on India

S&P: India's ratings to depend on next govt econ, fiscal policies.  Full Article 

Ambitious Aim

Ambitious Aim

In green car race, Toyota adds muscle with fuel-cell launch.  Full Article 

Deal Talk

Deal Talk

Piramal to buy 20 percent stake in Shriram Capital for $334 million.  Full Article 

Bond Market

Bond Market

A star abroad, RBI boss riles bond traders at home  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage