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India banks fear rising bad loans

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Jul 20, 2011
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India’s banks have begun sending out warning signals that a credit crisis worse than the one in 2008 could be just around the corner, according to analysts, bankers and credit rating agencies.

Non-performing assets are on the rise and have started showing up on Indian banks’ balance sheets. A lethal cocktail of record-high commodity prices, interest rates spiralling upward, weak markets and fear of a double-dip recession in developed economies has forced many Indian companies to restructure or default on their debt.

Indian banks have historically been well capitalised and were resilient through the credit crunch that led to the collapse of banking behemoths Lehman Brothers and Bear Stearns. However, for the first time since 2009, Asia’s third-largest economy is set to slow. The government recently cut its growth forecast to 8.2 per cent for the fiscal year to March 2012, from 9 per cent.

Analysts warn that unlike 2008, this time round the economic slowdown comes at a time when banks have already been piling up bad loans, putting extra stress on their balance sheets.

“We now think that the risk of asset quality issues arising in the banking sector has increased,” says Chetan Ahya, an economist at Morgan Stanley. A “slowdown in sectors such as real estate has already added to the concerns of a potential further rise in asset quality issues. There are [also] early-stage concerns on loan book quality issues for sectors such as non-banking financial companies and infrastructure”.

A recent report by IDFC Securities suggests at least 17 per cent of Indian banks’ outstanding loan assets could be on the verge of default. “Stubborn inflation, a spurt in interest rates and a slower economy are straining India Inc’s debt-servicing capacity,” it says.

Crisil, the Indian rating agency owned by Standard & Poor’s, expects overall bad loans held by Indian banks to rise from 2.3 per cent of their portfolio in the fiscal year ending March 2011 to to 2.6 per cent in the year ending in March 2012. That would exceed the 2.4 per cent hit during the crisis in 2008, and several independent analysts believe it could be significantly higher particularly in the small and midsize corporate lending sector.

The Reserve Bank of India, which has raised interest rates 11 times in the past 18 months as it seeks to tame rampant inflation and is expected to push them up again in September, has also expressed concern about worsening credit conditions.

Following a series of stress tests earlier this year assessing banks’ ability to withstand a fresh financial crisis, the central bank has asked lenders to set aside more cash for bad loans and to double provisions for restructured debt, after warning that non-performing assets could rise by 25 per cent this year to 2.92 per cent of total portfolios. By comparison, bad loans at US banks last year stood at 3 per cent of total loans, according to Moody’s data.

MD Mallya, chairman of the Indian Banks’ Association, says rising interest rates pose serious risks to the banking sector: “We will see further stress on asset quality due to [rising] interest rates,” he told the Financial Times.

India Infoline, a Mumbai-based brokerage, expects restructured debt to rise to about 3.5 per cent of total outstanding loans, to Rs1,100bn-Rs2,300bn ($24bn-$50bn), in the year ending in March 2013. They are currently estimated to be 2.7 per cent of total loan assets, according to Morgan Stanley data.

“The asset quality of [Indian] banks is a growing concern,” says Rajiv Mehta, a banking analyst at India Infoline, predicting a sharp increase in bad loans with public sector banks “the worst hit”.

State Bank of India, the country’s largest lender by market capitalisation, this month reported a steeper-than-expected 46 per cent drop in first quarter net profit due to a 75 per cent rise in loan provisions.

Worsening credit conditions have also increased the cost of insuring Indian banks’ debt. Spreads for SBI’s five-year credit-default swaps have widened more than 80 basis points this year to 245 basis points as of this week, the widest since July 2010, according to data provider CMA.

The current global macro economic troubles do not bode well for the sector, says Mr Metha. “We expect more banks to follow SBI by increasing their loan provisions as we expect non-performing loans to shoot up for some time … it’s not going to get better any time soon.”

However, the picture is not all doom and gloom. “Indian banks have shown resilience in the past and although bad loans are growing we are not in a panic situation,” says Mr Mallya, who also heads Bank of Baroda, one of India’s largest banks by revenue. “Companies are defaulting but we can manage it for the time being.”

India banks fear rising bad loans - FT.com
 
Mallu should rejoice. Interest rates will go down since oil price is going to stay below 85 $ for a while and might even fall below 50$ depending on few collapses in Europe.
 
Mallu should rejoice. Interest rates will go down since oil price is going to stay below 85 $ for a while and might even fall below 50$ depending on few collapses in Europe.

jdme we are discussing banks get back on topic On topic indian banks are right to be worried
 
The latest data shows the Indian economy growing at 7.8%, the slowest it has been for several years.

Bad time for a slowdown.
 
jdme come on yaar you was off topic and then i mentioned Indian banks are right to be worried. I didnt mean to upset you but you do tend to go off topic
 
jdme come on yaar you was off topic and then i mentioned Indian banks are right to be worried. I didnt mean to upset you but you do tend to go off topic


I replied to this:

MD Mallya, chairman of the Indian Banks’ Association, says rising interest rates pose serious risks to the banking sector: “We will see further stress on asset quality due to [rising] interest rates,” he told the Financial Times.

Now, pray tell, how I was off topic? Do you just read headline and than start giving opinion?

---------- Post added at 05:07 PM ---------- Previous post was at 05:04 PM ----------


It already has. Growth has gone below 8 point. We have have a crisis of supply. Demand is very high and supply bottleneck is destroying rupee. RBI prefers stable currency over growth.
 
Mallu should rejoice. Interest rates will go down since oil price is going to stay below 85 $ for a while and might even fall below 50$ depending on few collapses in Europe.

Please share your knowledge how is this oill price falling and mallu rejoicing got to do with india banks being in fear? On second thoughts dont answer. In future il let you go off topic as i realise you get wound up. Have a nice evening.
 
Please share your knowledge how is this oill price falling and mallu rejoicing got to do with india banks being in fear? On second thoughts dont answer. In future il let you go off topic as i realise you get wound up. Have a nice evening.


Oil price has direct impact on commodity prices which leads to runaway inflation. Inflation leads to RBI raising the interest rate and banks are getting hurt because high interest rate means less demand. A long as there is healthy demand, banks can manage bad loans.

Seriously, do you work or you are just a student? No wonder one cannot have decent discussion on PDF most of the time. To think that I have to deal with you everyday...
 
Are you really this thick? Well you are. I have seen your posts. Oil prices have direct impact on commodity prices which leads to runaway inflation. Inflation leads to RBI raising the interest rate and banks are getting hurt because high interest rate means less demand.

Seriously, do you work or you are just a student? No wonder one cannot have decent discussion on PDF most of the time.

Well lets first deal with your second point which is off thread as usual. I am not a student what thats got to do with the price of tea in china only god knows. It would appear a lot of people on the forum appreciate my posts as opposed to yours as I have done less posts and got significantly more thanks than you in fact double the amount of thanks you have. I have had lots of decent conversations with people of all nationality on this forum. Perhaps you should search elsewhere where you might appreciate more and in turn be more appreciated.

To your first point when a retard calls me thick I take that as a compliment as clearly a retard would not know what is thick and what is smart. You probably dont get that. I do not accept your assertions regarding banks. the banking sectors problems are on the whole and worldwide due to greed and bad fraudulent financial instruments in equal measure that very few even within the banking system understand. This is no different in india
 
Oil price has direct impact on commodity prices which leads to runaway inflation. Inflation leads to RBI raising the interest rate and banks are getting hurt because high interest rate means less demand. A long as there is healthy demand, banks can manage bad loans.

Seriously, do you work or you are just a student? No wonder one cannot have decent discussion on PDF most of the time. To think that I have to deal with you everyday...

Loan growth and loss reserves are two separate things. When banks have rising loan losses, they tend to scale back lending to preserve their capital. I'm actually not too worried about Indian banks. The 2.6% wapd, if true, is manageable.

I would be more worried about the 8% GDP trade deficit (twice the US rate). Plugging that hole with remittances like the Phillipines is no way to run an economy.
 
Loan growth and loss reserves are two separate things. When banks have rising loan losses, they tend to scale back lending to preserve their capital. I'm actually not too worried about Indian banks. The 2.6% wapd, if true, is manageable.

I would be more worried about the 8% GDP trade deficit (twice the US rate). Plugging that hole with remittances like the Phillipines is no way to run an economy.


Can you please explain this part?
 
Well lets first deal with your second point which is off thread as usual. I am not a student what thats got to do with the price of tea in china only god knows. It would appear a lot of people on the forum appreciate my posts as opposed to yours as I have done less posts and got significantly more thanks than you in fact double the amount of thanks you have. I have had lots of decent conversations with people of all nationality on this forum. Perhaps you should search elsewhere where you might appreciate more and in turn be more appreciated.

To your first point when a retard calls me thick I take that as a compliment as clearly a retard would not know what is thick and what is smart. You probably dont get that. I do not accept your assertions regarding banks. the banking sectors problems are on the whole and worldwide due to greed and bad fraudulent financial instruments in equal measure that very few even within the banking system understand. This is no different in india

Actually jdme is right. Oil prices have direct impact on inflation. Higher inlfation means hike in repo rates.

What is the relationship between oil prices and inflation?
 

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