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India's bad loans dwarf bank recapitalization plans

Government befuddled as heavy losses burden state-owned lenders

Punjab National Bank reported a net loss of 134.17 billion rupees for the January-March quarter, despite receiving recapitalization aid of 54.73 billion rupees. (Photo by Takaki Kashiwabara)

MUMBAI -- India's massive recapitalization plan for the country's beleaguered state-owned lenders appears overwhelmed as bad loans and bank losses mount, sparking calls for the government to increase the 2.1 trillion rupees ($31.1 billion) already earmarked for the effort.

Fourteen state lenders have posted combined net losses of 500 billion rupees for the quarter ended in March, a record figure expected to worsen after all 21 such banks disclose their results. The banks reported losses to the tune of 190 billion rupees for the quarter ended in December.

State-run banks form the backbone of India's economy, accounting for 70% of total assets in fiscal 2017. The deteriorating results make the process of selling off bankrupt assets crucial for the banks to resolve their debts, clean their balance sheets and resume big ticket lending.

As nonperforming loans grew, New Delhi devised the recapitalization program and mobilized the bankruptcy law to clean up the nation's financial system and let state-owned banks raise money from capital markets. The government pledged 880 billion rupees in January as a first tranche of aid to these banks. But the mounting losses since then have nearly negated the capital injection plans.

Leading lender State Bank of India received 88 billion rupees in aid yet recorded a net loss of 77.18 billion rupees for the January-March quarter, down from a profit of 28.1 billion rupees in the year-ago period. Gross nonperforming loans totaled 2.23 trillion rupees, soaring from 1.78 trillion rupees in the comparable quarter last year.

IDBI Bank, which received 106.1 billion rupees in aid, reported Friday a loss of 56.63 billion rupees in the quarter, wider than the net loss of 32 billion rupees in the year-ago period.

Punjab National Bank reported the deepest net loss, at 134.17 billion rupees, as the state-run lender recorded provisions to compensate for the $1.2 billion fraud that involved some employees issuing fake letters of undertaking. The bank received 54.73 billion rupees in recapitalization from the government.

Decades of slipshod lending and a lack of innovation have driven continual bank losses. The Reserve Bank of India, the central bank, in 2015 enacted strict instructions on accounting for bad loans. Lenders also needed to comply with global capital adequacy ratios.

But the recent spike in losses results partly from the central bank's decision in February to end various debt restructuring schemes at banks. Still, the losses were constrained by factors such as banks being permitted to spread their mark-to-market losses on bonds over a financial year, as well as a reduction of provisions for cases that were pending resolution before the company law tribunal.

Indian credit ratings agency CARE Ratings, in an analysis issued May 22, found bad loans totaling 7.31 trillion rupees from 26 local banks including major private and state lenders that have disclosed earnings so far. The figure represents an increase of 2.5 trillion rupees over March 2017. Bad loans at state banks alone soared to 6.16 trillion rupees, from 3.98 trillion rupees a year ago and 5.23 trillion rupees in the December quarter.

Analysts warn that banks likely will continue posting losses for some time. Ratings agency ICRA expects such losses to continue during the financial year that began in April. Saswata Guha of Fitch Ratings projects such troubles for another two or three quarters, but he thinks the worst is over regarding the recognition of legacy bad assets.

Experts from both ICRA and Fitch also agree that the government might have to increase its recapitalization allotment to banks beyond what has been announced.

Market watchers see a ray of hope after Tata Steel's successful bid for Bhushan Steel under the bankruptcy code. Bhushan is the first among 12 large companies facing default that were referred to India's National Company Law Tribunal last year. State Bank of India is among the lenders to benefit from the resolution.

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