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Its Now or Never For Indian Banks


One of the biggest threats to the Indian growth story is the disproportionate amount of bad loans in the Indian banking system. We have covered the true scale of the problem exhaustively in our previous article "The Indian Baking Crises is Just Beginning"
Q4 results have once again turned out to be a horror show for the PSU banks with Bank of Bardoa the nations second biggest bank reporting a consecutive loss of 3,230.14 crore. On freaky Friday, four other state-run banks – Central Bank of India, UCO Bank, Allahabad Bank and Dena Bank also showed their class by reporting net losses for Q4 on the back of higher provisions for bad loans.
Rising bad loans in the system at a time when a majority of analysts, companies and institutions are bullish on India are threatening to derails PM Modi’s ambitious reforms drive that is rather chugging along slowly.
Increasing loans provisioning is a double edged sword that not only cuts banks profitability but also leads to lower credit growth hurting the industry.  Banks’ loan growth at 10.7% has been the slowest in nearly two decades.
This is a particularly dangerous situation given that India needs to pull itself by its bootstraps at a time when the entire world is suffering from a rather powerful hangover of falling commodity prices, slowing growth and trade, unconventional monetary policies, currency wars and other assorted economic and sociopolitical ills and ailments.
We thought that it would be interesting to compare the size of the problem and hope this comparison should serves as a rude kick to those pea-sized brains of the bank managements and a majority of Indian policy makers.
Abhishek Bhattacharya of India Ratings and Research estimates about Rs 13 lakh crore ($195 billion), or a fifth, of bank loans are already stressed – bigger than the size of New Zealand’s economy($170 billion).
RBI chairman has been steadily tightening the screws on the banks and has set a ambitious target of cleaning their pristine clean books by March 2017, but whether that will come to pass or not is anybody’s guess.
Although the private sector banks have been affected to a lesser extent they are certainly no beacons of excellence. ICICI Bank and Axis Bank combined have placed Rs.70,000 crore on their watch-list’.
Watch list – Meaning “Mere paise ko loot liya gaya tha”
ICICI Bank had said during the post earnings conference call that it had internally identified loans worth Rs.44,000 crore or 10% of its loan book as below investment grade.
Below investment grade loans to the stressed iron & steel and power sectors contribute 2.1% of the banks loan book.
“We expect the challenging operating and recovery environment for the corporate segment to continue in FY2017,” said N.S. Kannan, Chief Financial Officer of ICICI Bank while addressing the analysts.
“Reserve Bank of India (RBI) would continue with its objective of early and conservative recognition of stress and provisioning; and the approach of banks would also reflect a more conservative stance. Slippages from the restructured portfolio are expected to continue,” Mr. Kannan added.
Axis bank which had a tepid Q4 said that “The bank’s outstanding on the ‘Watch List’ accounts at the end of Q4 FY16 was around Rs.22,600 crore,” post its results announcement. 50% of the loans on the watch list are in the iron, steel and power sectors.
“We expect around 60 per cent of the ‘watch-list accounts to flow into the non-performing asset (NPA) category over the next 8 quarters,” the bank said. It added that while it is difficult to predict the timing of slippages precisely, a slight bias is expected during the first half of 2016-17.
“The management (of Axis Bank) has identified loans worth Rs 26,000 crore as stressed loans, and has placed them in the watch list,” broking firm IIFL said in a note to its clients
“It could get worse before it gets better is the sense we have,” India Ratings’ Bhattacharya said
Article By: Bhuvanesh Reddy

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