Indian Banks: What Next?

In a recent research report titled “India: No ‘banking’ on growth”, Goldman Sachs has some interesting analysis on Indian banks.

The borrowing spree of the previous few years is increasingly causing strains on banks’ balance sheets.

India corporate leverage

A sharp increase in stressed assets is a big overhang for the banking system and Indian banks’ Gross NPLs are the highest in the region. However, provisions for stressed assets are still low, and the lowest in the region.

indian stressed assets

The infrastructure sector contributes about 30% of total stressed assets, even though its share in total loans is only about 15%. Also, their research suggests that a 1% increase in real GDP growth will increase credit growth by 1.7%. So there could be significant positive spillover effects if clogged investment projects come on stream.

feedback loop

Basically, once GDP growth starts picking up, it will unclog the banking system. And the key to kick starting growth is to see the already-sanctioned projects through by removing bottlenecks.

Banks: Where do we go from here?

India, the third largest economy in Asia, saw its lowest growth rate in a decade for the fiscal year ending March 2013. The yearly average of 5% was only a tad higher than the last quarter growth rate of 4.8%. Slow economic growth has also affected banks, drastically so for state-run sectors. Loan defaults are piling up as companies go bankrupt. And the companies that can pay via their loaded promoters are trying to wheedle out through corporate data restructuring (CDR).

Private or public, the graph slopes down

Banks saw a 51% hike in non-performing assets (NPA) in 2012-13, with the scale tipping towards public sector banks (PSB) that lend funds out of noblesse oblige. Since the government holds a majority stake in PSBs, the banks have to finance groups and projects that may not be commercially viable but need to be supported for “social good” or “nation building.” The fact that these government initiatives are eventually funded by the taxpayer makes no difference.

Furthermore, state-run banks have a different investment agenda from private players that’s often triggered by a “me too” mindset. It’s common for PSBs to pool funds into industries backed by the government or supported by other state-run banks. Risk assessment checks are inadequate even though public sector banks typically involve more documentation and longer approval cycles, at least for the common man.

The net profit of 38 listed banks in the private and public domain showed a mild rise of 3.63% in the March quarter with private banks outpacing their public counterparts. The net profit of PSBs actually fell by 6.64% while that of private banks rose by 24.63%. The growth rate for the fiscal year amounts to -2.63% and +28% for respective sectors.


Net profit drop in United Bank
Net profit drop in United Bank


State Bank of India, Punjab National Bank, Bank of Baroda, Bank of India and Canara Bank – all showed loss in the March quarter though SBI’s net profit rose 20.5% over the year. Private sector banks such as ICICI Bank Ltd, HDFC Bank Ltd, Axis Bank Ltd, Kotak Mahindra Bank Ltd, Yes Bank Ltd and IndusInd Bank Ltd saw quarter and year net profit rate hikes ranging from 21% to 47%.

Next up, operating profits across banks rose by 6.78% through the March quarter, with private banks experiencing close to 25.41% growth and PNBs only 0.52%. The underlying difference seems to be better control of bad loans by private banks. Public sector banks have had to set aside hefty amounts to cover bad debt, impacting their net profit substantially.

CDR misuse

Indian banks have recast over ₹2 trillion under the CDR mechanism that gives companies under stress some relaxation through lower lending rate and extension of repayment periods. While the objective of CDR is to give debt-laden companies a second chance, it is being grossly misused by companies with affluent promoters well able to infuse funds into the dying business. Kingfisher Airlines is one such case.

In a bid to control CDR misuse and reduce bad debt, Finance Minister P Chidambaram has come down hard on loan defaulters, recommending strict steps for banks to recover funds without hurting the industry. The RBI too is working on the final guidelines to increase the promoter’s contribution in restructuring to a minimum of 15% of the diminution or 2% of the restructured debt, whichever is higher. Banks can demand more from promoters depending on the risk of the project and the promoter’s financial ability to commit.

As a result, banks are showing some clout to recover debts – UCO Bank issued a public notice against Nitin Kasliwal, chairman and MD of S Kumars Nationwide Ltd, guarantor of a ₹110.07 crore loan taken by Reid & Taylor. The ad carries Kasliwal’s picture as well in a bid to “name and shame.” Kingfisher Airlines is not having it easy either.

The banking slowdown hasn’t bottomed out yet as the chances of accelerated economic growth is dim for another few quarters. Regulatory tightening and control of willful loan defaulters will help banks to a degree but no respite is expected from the RBI this time in view of inflation and high current account deficit. Banks will just need to cut their loss and swim with the tide for now.



[stockquote]AXISBANK[/stockquote] [stockquote]BANKBARODA[/stockquote] [stockquote]BANKBEES[/stockquote] [stockquote]BANKINDIA[/stockquote] [stockquote]CANBK[/stockquote] [stockquote]HDFCBANK[/stockquote] [stockquote]ICICIBANK[/stockquote] [stockquote]INDUSINDBK[/stockquote] [stockquote]KFA[/stockquote] [stockquote]KOTAKBANK[/stockquote] [stockquote]PNB[/stockquote] [stockquote]PSUBNKBEES[/stockquote] [stockquote]SBIN[/stockquote] [stockquote]UCOBANK[/stockquote] [stockquote]YESBANK[/stockquote]

Banking for the poor: Will corporates do what PSUs failed to?

In India, there are about 6,00,000 villages, but out of these only 60,000 villages have banking facilities which means 90 % of the villages are unbanked. Against such a grim background, the Reserve Bank of India’s (RBI) recent decision to issue new licences to private corporates and public sector entities has aroused renewed hopes of improving banking services in unbanked areas.

Since India has opted for a bank-driven model to achieve financial inclusion, banks will play a crucial role in the whole process of inclusive growth.


So far, RBI has made the right noises as far as improving financial inclusion is concerned saying banks must view it as a business opportunity rather than an obligation. While issuing guidelines for bank licences in February, RBI had said, “The business plan of applicants will have to address how the bank proposes to achieve financial inclusion.”

While the intent of institutions and regulators is little to doubt, they have all come a cropper as far as execution is concerned and it is high time that we differentiate the ‘doers’ from the ‘talkers’?

Financial inclusion has been a dud so far due to lack of technology, lack of a viable business model, higher cost of transactions and absence of reach and coverage, etc.

SEPT 2012

Every year, the government spends thousands of crores (Rs 14,000 crore in 2013-14) in recapitalising public sector banks to enable timely and adequate credit and other financial services to the weaker sections and low income groups. However, PSU banks have failed to extend basic banking services to the ‘bottom of the pyramid’ due to various factors like lack of clear policy framework and poor infrastructure and execution, resulting in financial inclusion remaining only on paper.

Institutions must overcome primary challenges like high cost of transactions, huge initial investments to create the necessary infrastructure and other expenses like financial education for the poor before financial inclusion can yield dividends.

But in this era of cut-throat competition, where banks are constantly driven by higher interest margins and intoxicated by the ideology of profit maximisation, asking bankers and financial executives to opt for social banking is a conflicting proposition that makes for a great headline but will make little headway.

Past efforts like nationalisation of banks, Lead Bank Scheme, development of Regional Rural Banks and formation of Self-Help Groups to take banking services to the masses have failed to increase penetration. Even the much-famed business correspondents (BCs) model has been a laggard.



In this context, a critical question that matters is- will corporates be able to design and deliver innovative financial services at affordable cost?

Corporates must create better awareness about banking facilities and design products which are poor-centric to ensure that the poor shed their inhibitions while approaching a bank.

Another area that corporates must grapple with is the high clout that politicians and bureaucrats wield in rural areas. Driven by electoral gains, many politicians exercise undue influence to push PSU banks to extend agricultural credit and other goodies to rural households, particularly close to elections. (Example- Rs 52,000 crore Farm Loan waiver.)



In the case of the farm loan waiver, a lot of funds, aimed at poor farmers, were allegedly diverted by middlemen and politicians. The mandate for corporates is to use financial inclusion to effectively check corruption and empower the poor.

But since they have been mandated to open only 25% of the branches in unbanked areas, it is hard to figure out if they can make any meaningful impact in addressing financial inclusion.

[stockquote]PSUBNKBEES[/stockquote] [stockquote]BANKBEES[/stockquote]

PSU Banks vs. the Rest


PSU banks [stockquote]PSUBNKBEES[/stockquote] have under-performed the market this year, up just 7% vs. the sector’s [stockquote]BANKBEES[/stockquote] 22% and the market’s [stockquote]NIFTYBEES[/stockquote] 9%. 2011 was not kind to the dinosaurs either, -42% vs. the Nifty’s not so great -16%.

In fact, the only time the PSUs outperformed by a meaningful measure was during the panic of 2008, where they tanked less than the rest of the market.

The gloom and doom scenario includes rising NPAs, pension provisions and rising costs leading to more capital raises. Besides, given the experience of minority shareholders in the government owned Coal India [stockquote]COALINDIA[/stockquote], FIIs have been fleeing from public sector companies in general.

PSU banks are overexposed to bankrupt state electricity boards, with no glimmer of hope in the horizon. And given the weak monsoon, the direct exposure these banks have to the agriculture sector might land a double whammy in 2012.

But given the 35% drop since 2011, this sector is worth a second look. The Finance Minister is making the right noises regarding the deficit. The monsoon may not turn out to be all that bad after all. NPAs are getting worked through and it looks like banks will be exiting 2012 with a decent balance sheet. Besides, the yield curve is positive, so the banks don’t have to try too hard to make money. The 2012 budget has sanctioned Rs. 15,888 crore to be provided for capitalization of public sector banks and financial institutions to get them Basel III compliant, so the capital situation is not that bad.

PSUBNKBEES technical analysis charts

Currently the PSU Bank ETF looks like its resting on a weak support at Rs. 300 and the near-term upside seems limited. However, if it heads towards Rs. 250, be prepared to pull the trigger.

PSU banks should on every investors radar. Remember Warren Buffett: “Buy what everybody hates”


India Inc lands ‘bailout’ via CDR route

Mascotte Air India / Air India Mascot

(Photo credit: Wikipedia)

Headwinds from struggling domestic economy as a result of rising inflation, interest rates, lower profitability and weak demand continue to weigh on corporate India. This has severely impaired their ability to service debt and a record number of companies are knocking on the doors of corporate debt restructuring (CDR) cell to recast their loans.

The total number of debt restructuring cases received by the CDR cell increased from 305 (debt aggregating Rs 1,38,600 crore) as on March-end 2011 to 392 (debt aggregating Rs 2,06,493 crore) at the end of March this year.

The total amount of debt approved for recast by the CDR cell was Rs.1,50,515 crore as of March 31, with new debt of Rs.39,601 crore adding to the sticky loan amount in 2011-12, the highest since the CDR cell was launched in 2001.

imageCreditors bring cases to the CDR cell, an informal forum of bankers approved by the Reserve Bank of India, to renegotiate repayment terms with struggling borrowers and help them avert the defaulters tag.

A large number of iron and steel, infrastructure, telecom and textiles companies are in the danger zone. Some of the big-ticket cases that have taken the restructuring route include telecom tower services provider GTL [stockquote]GTLINFRA[/stockquote], shipbuilder Bharati Shipyard [stockquote]BHARTISHIP[/stockquote], Air India, Kingfisher Airlines [stockquote]KFA[/stockquote], Hindustan Construction [stockquote]HCC[/stockquote], Leela Hotel [stockquote]HOTELEELA[/stockquote] and several sugar and steel mills. Jindal Stainless [stockquote]JSL[/stockquote] is the latest entrant to this infamous club. It has approached lenders to reschedule repayments of its over Rs 9,000 crore debt.

Bank loans to large airlines and State Electricity Boards (SEBs) and Discoms (distribution companies) also face the risk of default, though these are currently not under CDR restructuring. Air India’s Rs 22,000 crore CDR and those of SEBs, which is close to Rs.30,000 crore, were restructured outside the cell.


The slowdown in industrial growth resulted from rising input and borrowing costs, due to which investment and consumption growth moderated in interest-sensitive sectors.

imageWhile a slowing economy hurts the ability of companies to repay their debt, some bankers feel many promoters, who have got their loans restructured, are misusing the corporate debt restructuring (CDR) mechanism by passing on their burden to the lenders.

Amidst such dire situations, the government is only doing more harm to lenders. Last month, the centre directed lenders to rejig Rs 35,000 crore of loans to textile firms, adding more restructuring burden on banks. Ideally, the minimum interest rate to which the coupon is reduced to in a restructuring package is the base rate. The package involves bringing debt service coverage ratio to a respectable level, converting part of loan into equity etc.


Public sector banks [stockquote]PSUBNKBEES[/stockquote] continued to witness a rise in bad loans during the March quarter due to restructured assets. During the March quarter, SBI [stockquote]SBIN[/stockquote] recast loans worth Rs 5,100 crore against Rs 2,100 crore in the December quarter. Banks have to set aside more money in the form of provisioning on restructured advances, which affects profitability.

The macro environment remains challenging with sluggish business outlook, policy uncertainties, limited access to fund raising avenues for highly leveraged companies and project implementation delays. Clearly, we have not yet seen the worst on bad loans front.