Opinion Looking for a silver lining

Analysts have been flagging off concerns of rising loan losses for some time now. Recently,rating agency CRISIL highlighted that a Rs 56,000 crore exposure to the power sector could be at risk,given that the finances of the state electricity boards (SEBs) are in a shambles and that state governments haven’t upped tariffs as much as they need to. The SBI may not have lent too much to SEBs but Punjab National Bank has already restructured one SEB loan and Bank of India (BoI) has confirmed that it is next in line. In fact,many of the smaller equipment vendors could be in trouble because they are always the hardest hit in a downturn. But the bigger hits to banks’ bottom lines could come from the large corporate accounts like a Kingfisher Airlines,which owes banks some Rs 7,000 crore and seems like it is on the verge of bankruptcy. There are a couple of other accounts like GTL,which has become a CDR (corporate debt restructuring case),and Air India. Banks may claim that loans that are restructured are not lost and that only the tenure of the loan has been extended. But there have been slippages in restructured loans too. For sure,there is no cause for alarm yet; Indian banks are fairly well-capitalised and,as has been pointed out,far less leveraged than many of the banks overseas; the ratio of assets to tier I capital is about 12-14 times.

Also,as a share of total loans,the NPAs don’t look so scary yet; the SBI’s gross NPAs,for instance,amount to 4.2 per cent of the loan book. But if the loans themselves grow at a slower pace,as they are bound to in a slowing economy,that number could soon look a lot uglier.

In other words,unless there is a quick turnaround in the economy and both inflation and interest rates come off,the quality of loan portfolios could surely deteriorate and to that extent Moody’s outlook doesn’t come as a big surprise. As the rating agency has pointed out,part of the problem lies in that the government’s finances are not in great shape and the more it borrows the less there is for the private sector. More important,the government is not able to support the state-owned banks with capital; it has been struggling for over a year to come up with a paltry Rs 5,000 crore for the SBI. While PSU banks had asked for about Rs 18,000 crore worth of capital for 2011-12 ,the government is understood to have said it will give them some Rs 14,000 crore. Where that is going to come from remains to be seen because the government’s coffers are not exactly overflowing: revenues in the first half of the year have come in at just over Rs 3 lakh crore,down 24.4 per cent y-o-y,whereas the government has spent Rs 6 lakh crore,11 per cent more than it did between April and September 2010. And it is obviously not done with the spending given the large fuel and food subsidy bills. So much so that economists now believe the fiscal deficit for the current year could edge closer to 6 per cent of GDP,way above the government’s estimate of 4.6 per cent at the start of the year. Moreover,if corporate performance remains weak next year as it is likely to be this year,the government won’t collect the kind of tax revenues it would like to. Which means it will again be hard-pressed to capitalise banks.

The unfortunate outcome of the Moody’s downgrade is that Indian banks would need to shell out more to borrow in the markets overseas at a time when spreads have already risen by about 200-250 basis points. Moreover,tapping the equity markets at a time like this would mean selling stock cheap. It is the government that is to blame for the difficult situation that banks find themselves in; the slowdown is more the result of inaction than anything else,as is high inflation. One hopes it will behave more responsibly in the future; with the next general election just a couple of years away,one cannot but be reminded of the Rs 60,000 crore loan waiver of 2008.

The writer is resident editor,‘The Financial Express’,Mumbai
shobhana.subramanian@expressindia.com