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Indian banks face their biggest test


Even before the pandemic, Indian banks were in trouble. With one of the highest bad debt ratios in the world, at least five lenders have had to be rescued from collapse since late 2018. Several more were in a precarious state. Already creaked under the pressure, the sector is now facing one of its biggest tests: coming out of the crisis intact.

A strict foreclosure in place for several months starting in March has been devastating for the businesses of borrowers large and small. This in turn triggered a historic economic contraction – projected by the IMF to 10.3 percent for the year ending March – which was made worse by the spiraling number of Covid-19 cases. But while the government’s emergency relief measures for borrowers helped ease the immediate blow to banks, this support is now being phased out.

“It’s like being in the middle of a storm,” said Uday Kotak, managing director of Kotak Mahindra Bank, one of India’s largest private banks, which like most banks has benefited from this support. “We hope most of the boats reach the other side of the shore, but we can’t take that for granted.”

Mr Kotak, who is one of the richest bankers in the world with a net worth of over $ 16 billion, added that with the lifting of lockdowns and a downward trend in the number of cases: “For the financial sector players who are in a position to the other side, there will also be a significant opportunity.

Business credit growth stagnates

Swords hanging over the system

Borrowers affected by the pandemic had until the end of 2020 to apply to restructure their debts with banks through a unique program designed to prevent a sharp rise in defaults.

Other measures – including a moratorium on loan repayments in effect from March to August, followed by a Supreme Court order directing banks not to classify loans as defaults – mean the scale problems will only become apparent in the coming months.

Reserve Bank of India

The Reserve Bank of India expects the ratio of non-performing bank assets to fall from 7.5% in September 2020 to 13.5-14.8% in September 2021 © Dhiraj Singh / Bloomberg

The Reserve Bank of India, the country’s central bank, acknowledged that the relief measures may have masked the extent of the damage, saying in a report last month that “the quality of the banking system’s assets could deteriorate sharply in the future ”.

Either way, the ratio of non-performing bank assets is likely to soar. The RBI projects an increase from 7.5% in September 2020 to between 13.5% and 14.8% in September 2021. Fitch said last year that Indian banks would need $ 15-58 billion in recapitalization by 2022.

“There are still quite a few swords hanging over the banking system,” said Ajay Mahajan, managing director of the Care rating agency and a former executive at several Indian and foreign banks. “We’ll have to see the results to make a judgment on how the system has responded to the whole pandemic.”

RBI expects bad debts to increase

Chronic bad debt issues

The country’s banking system is dominated by a dozen state-owned banks which control about two-thirds of the assets, a legacy of a banking nationalization from 1969 to the socialist era. But private competitors like Kotak Mahindra and HDFC Bank have gained stakes since the 1990s and 2000s, with the liberalization of the economy.

Foreign names like Citibank, HSBC and Deutsche Bank have also developed local operations focused on niche markets like retail banking for rich and distressed debt.

The industry’s chronic bad debt problems have resulted in several near misses. At the beginning of March of last year, the central bank had to intervene to save The Yes Bank, hit by the scandal, one of the country’s largest private lenders, from the collapse.

In November, he stepped in again to oversee a takeover by DBS Bank of Lakshmi Vilas Bank, a regional lender whose decline predated the pandemic and shook the markets.

A customer uses an HDFC ATM on a van in Mumbai, India in May 2020

Private competitors like HDFC Bank have gained market share since the 1990s and 2000s with the liberalization of the economy © Dhiraj Singh / Bloomberg

Some fear that the sector, already weak before the crisis, could weigh on the financial system for years to come.

Capital Economics, a consultancy firm, warned in a memo that the need to tackle the rise in NPLs would weigh on profitability and restrict lending and ultimately growth in what had been one of the the world’s most dynamic economies.

Others hope the pandemic will force upheaval in a moribund and scandal-prone industry that has been held back for years by the warm bond between tycoons, bank executives and politicians that translates into misdirection of capital into financial markets. costly vanity projects that often fail.

Analysts said the best-run banks, mostly private but some state-owned, are well positioned to gain market share. A recent rally in Indian stocks, which pushed the benchmark Nifty 50 to an all-time high this month, helped companies like the State Bank of India and Kotak Mahindra recapitalize quickly, raising billions of capital for strengthen their balance sheet and their coverage against non-performing loans.

Private banks have gained market share from public lenders

An opportunity for money abroad

Following the takeover of Lakshmi Vilas by DBS, other foreign banks see an opportunity to grow if regulators have become more open to foreign capital after years of reluctance.

“All this Lakshmi Vilas bank, the way the [central bank] The handled shows hints of things to come. . . that there is a need ”for foreign money, said Kaushik Shaparia, managing director of Deutsche Bank in India. “The [public-sector] the capacity of banks to absorb all of this is limited. ”

Deutsche has invested around $ 1 billion in India since late 2018, Shaparia said.

Foreign investors have also surrounded other struggling financial sector assets. Oaktree Capital Group, the Los Angeles-based fund, is one of the latest bidders for the books of Dewan Housing Finance, a shadow bank that collapsed into bankruptcy in 2019 and is the first financial firm to restructure using the country’s four-year-old insolvency code, which aims to speed up the process.

Some hope that greater foreign participation in the financial system will solve a chronic shortage of domestic capital willing to take risky bets and help speed up the often tortuous process of recovering distressed lenders.

But executives and analysts said it was difficult to say how much the composition of Indian banks’ shareholding will change and, with the impact of the pandemic still uncertain, the investment case remains to be seen.

Branch of Lakshmi Vilas Bank in Connaught Place, New Delhi, India in November 2020

Following the takeover of Lakshmi Vilas Bank by DBS, other foreign banks see an opportunity to grow if regulators have become more open to foreign capital © Alamy

The final months of 2020 saw improvements in corporate earnings, demand metrics, and the number of daily Covid-19 cases fell below 20,000 from nearly 100,000 in September. But it’s unclear how many borrowers will have viable businesses once the last of the relief measures run out and they continue to pay off their debts.

“You have to look at the ground level reality in terms of small business performance and employment to see how good the balance sheets will be,” said Sanjay Nayar, President of KKR India. “The jury is at least until March, if not June, to see what the quality of the books is.”



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