Indias 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, Asias 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 Incs debt-servicing capacity, it says.
Crisil, the Indian rating agency owned by Standard & Poors, 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 Moodys 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 countrys 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 SBIs 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 its 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 Indias largest banks by revenue. Companies are defaulting but we can manage it for the time being.
India banks fear rising bad loans - FT.com