India’s state banks’ bailout stumbles as losses mount

MUMBAI: When the Indian government announced a surprise $32 billion bailout plan for the nation´s state-controlled banks last October, credit rating firms and the nation´s central bank saw it as a huge step to getting the industry back to robust health and lending more to businesses and consumers.

But their optimism may have been majorly misplaced judging by the latest numbers coming out of the banks.

And that may in turn crimp economic growth in Asia´s third-largest economy. Thirteen state banks have reported combined losses of $8.6 billion for the year to March including $6.5 billion in the last quarter - and their non-performing loans have surged nearly a fifth from end-December levels.

Two state banks have reported modest profits and six are still to report.

While many of the banks, including top lender State Bank of India, have said the worst is probably over, they still see one or two more quarters of pain.

That means more bad loans getting disclosed and loss provisions shooting up as a central bank order will cause more debt defaulters to be dragged into bankruptcy.

"The government capital is only going to just plug the hole, there is definitely no growth capital," said Udit Kariwala, an analyst at Fitch Ratings´ India Ratings & Research.

He said smaller state lenders with limited ability to raise capital from the market will have to curtail their lending.

The 21 state lenders hold two-thirds of India´s banking assets, and accounted for the bulk of the record $150 billion of soured loans in the banking sector last year.

The banks, which have been blamed for indiscriminate lending to sectors such as metals and power that turned sour, can still be held responsible for much of the balance sheet carnage.

A more than $2 billion fraud at India´s second-biggest state lender, Punjab National Bank, disclosed less than four months ago, not only left a hole but also underlined how weak the banks´ grip on risk is.

Exacerbating the problems is a move in February by the Reserve Bank of India, the nation´s central bank, to withdraw half a dozen loan restructuring schemes that banking experts said were helping banks to avoid disclosing dud loans.

It also tightened other rules governing bad loan accounting.

In addition, the RBI this month banned Dena Bank, a loss-making smaller state-run lender, from making any new loans.

Days later, Allahabad Bank, another smaller state-run lender, said it had been asked by the regulator not to increase the number of risky loans and costly deposits on its books due to its capital and leverage positionBank analysts say more state banks could come under similar restrictions aimed at conserving limited capital.

The RBI already has 11 state lenders under its "prompt corrective action" framework that restricts them from expanding. That is not all. Capital needs will also be exposed by global banking rules fully kicking in by March 2019.