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India’s rising bad loans not a ticking time bomb

Dubai: Rising non-performing loans of Indian banks are not a looming systemic risk for the economy or the financial sector of the country, SBI chairman Arundhati Bhattacharya said in Dubai on Sunday.

“Very often we hear comments from media, multilateral financial institutions and some rating agencies that India’s banking sector is sitting on a time-bomb. In reality, the NPL doesn’t pose such huge systemic risk as it is made out to be,” said chairman of India’s largest commercial bank.

Global rating agency Moody’s Investors Services last month warned that Indian banks will require more capital than what the government has allocated in the interim budget, especially in the context of higher capital requirements under the Basel III norms and increasing bad loans that would require banks to set aside more money to cover such loans.

The rating agency expects that bad loans will continue to rise at Indian banks in the fiscal year ending 2015.

“Indian public sector banks’ need for significant external capital is a result of an increase in non-performing loans owing to the country’s slowing economy and infrastructure bottlenecks, and profitability that is insufficient for internal capital generation to fund loan growth,” Moody’s said.

As of December 2013, rated public sector banks reported an average gross NPL ratio of 4.3 per cent (of total loans), up from 3.4 per cent in March 2013. Gross non-performing assets (NPAs) of Indian banks rose to Rs2.4 trillion at the end of December, about 36 per cent up compared with the same period last year.

Bhattacharya said the higher NPLs are the result of slowing economic growth in the country that has resulted in decline in production and low capacity utilisation in the manufacturing and service sectors.

“A few years ago the economy was growing at 9 per cent and the current growth rate is below 5 per cent. The slow growth means many investors are struggling to meet their loan obligations from their operating incomes. This eventually leads to rising bad loans,” said Bhattacharya.

The State Bank of India chairman also blamed structural issues such as lack of depth of debt capital markets, and poor performance of the equity markets and lack of longer term funding options available for infrastructure development.

“There has been a shortage of capital raising through both debt and equity market instruments in recent years. Thus a significant portion of long- term financing is undertaken through bank loans. When funding longer term loans with relatively shorter term funds, asset-liability mismatches do occur,” said Bhattacharya. She said the financial sector should rethink the current financing pattern of these projects and create adequately deep longer term debt markets in the country.

Overall, she said the economic slump has bottomed out and there are clear signs of green-shoots in the economy with the loan demand picking up. “The political situation in the country will be crucial for the economy. If the electoral mandate is not a very fragmented one, I expect the economy to move into a stronger growth trajectory by the middle this year,” she said.