Bad loans to rise till Sept, downgrades over: India Ratings

Saikat Das
moneycontrol.com

Banks may not be facing any major threat to their ratings, but could continue to see a rise in their non-performing loans till September this year, says Ananda Bhoumik, Senior Director,India Ratings & Research, the domestic arm of global rating agency Fitch. 

"In Q4, we will continue to see accretion of NPLs. Bad loans will continue to rise till September (2013). The trend that you have seen till December will probably persist,” Bhoumik told moneycontrol.com in an interview.

“A few lenders like Canara Bank and Allahabad Bank have guided that they will bring down bad loans. Others are hopeful that it is bottoming out. Also, there is a very strong restructuring pipeline," he said.

Below is an edited excerpt of the interview:

Q. Is there any threat to further banking downgrades?

A. A bulk of our ratings is stable. We did downgrade two banks recently: Andhra Bank in January and Vijaya Bank in 2012. They were put on negative outlook. We are probably through with the most of downgrades, which took place for structural reasons. Those are now over. The only bank, which is under negative rating watch is the Dhanlaxmi Bank.

We currently rate 35 banks including 20 public sector banks. The rest are private and foreign banks. Most of our ratings are on a stable outlook.

Q. What may prompt you to relook at downgrades?

A. Downgrades may happen again in case the exposure (bank credit) to infrastructure proportionately goes up. Infrastructure sector will continue to struggle. The sector puts many sorts of pressure on banks. One, these are long ended projects. Two, banks typically have short term liabilities. Then, it takes a while to generate a positive cash flow.

Our stress test suggests, Indian banks have the wherewithal to absorb their stresses through their P&L and through their capital. So, we are not overtly concerned.

Also read: Bank loans miss FY13 RBI projection; grow 14% yoy

Q. So, are upgrades set to happen any time soon?

Upgrades are not happening in a hurry. There are structural imbalances in the funding side as well. This is particularly true for government banks. The short term deposits of last five years have gone up while on the lending side, tenure has been longer and longer.

Consequently, the miss-match between asset inflows and outflows up to the one year bucket has now increased. On an average it is now close to 20% of total liabilities for all banks. In early 2000, when government banks were actually surplus (in liquidity), this number was at 5%. It is a very noticeable difference.

Q. Will banks continue to reel under asset quality pain?

A. In January-March quarter, we will continue to see accretion of NPLs. Bad loans will continue to rise till September. The trend that you have seen till December will probably persist. A few lenders like Canara Bank and Allahabad Bank have guided that they will bring down bad loans. Others are hopeful that it is bottoming out. Also, there is a very strong restructuring pipeline.

Others are hopeful that it is bottoming out. There is obviously very strong restructuring pipeline.

Q. Power loan restructuring: To what extent can it hit banks' profitability?

A. That needs to be worked out case by case basis. It depends on yields and coupons offered for the banks in terms of state government bonds. One has to keep in mind that it will be significant credit quality pick when SEB loans converted to state government guaranteed bonds. Because of this transition, the impact should not be very significant.

Q. RBI has cut policy rates by 100 bps since last April. But, is the policy transmission (benefits of rate cuts) happening?

A. Since April, 2012 when the easing started, even 50% of that rate cut benefit has not been passed on to the customers.

There is more and more refinancing pressure because in the increased reliance on the short term borrowings. Bank borrowings in Certificate of Deposits (CDs) and Liquidity Adjustment Facility (LAF) have gone up. Banks are not bringing down deposit rates. They are unable to do so.

If banks cannot bring down their deposit rates, they will not reduce lending rates due to the fear of (net interest) margin contraction. If banks don’t decrease lending rates, borrowers will suffer due to lack of growth and higher input prices.

The benefits of monetary easing are not available to the economy if banks cannot cut their lending rates due to inelastic borrowing costs. It may hurt the assumption that funding is the strength for Indian banks. It could well be a rating driver especially for small and vulnerable banks.

Q. So, what is the way out?

A. Unless banks change their funding structure, they cannot bring down deposit rates. It is now a systematic issue. The way out is the reversing of structural imbalances. Lenders need to have a more matched ALM. Banks can issue 10 years bonds which pension and insurance funds would be happy to subscribe.

Q. How are Indian banks placed to meet Basel III (global standard for banks’ capital) norms?

A. The immediate requirement has been met on day one. The system has transited to Basel III. The requirement in FY14 is extremely modest. It will be met comfortably. Till FY15 it should not be any problem. However, the pressure will start building thereafter. And it will swiftly pick up next three succeeding years.

saikat.das@network18online.com