The Economist - USA (2021-01-30)

62 Finance & economics The EconomistJanuary 30th 2021

C

rippled by yearsof mismanagement,

much of India’s financial system was

poorly positioned even before the turmoil

of covid-19. s&p, a rating agency, reckons

that non-performing assets as a share of

loans came close to double digits in 2019—a

much higher rate than other big emerging

markets, except for Russia. The govern-

ment’s own straitened finances meant that

there was little scope for aid when the crisis

struck. Instead, it put off a reckoning while

minimising upfront costs. A moratorium

that was in place until August let borrowers

skip payments and banks pretend they

were being paid; another provision al-

lowed loans that would otherwise be

placed in default to be restructured.

Banks’ earnings for the final quarter of

2020, which are starting to be released,

contain hints of what unfolded after the

moratorium ended. Earnings reports from

the successful private-sector banks, nota-

bly hdfcand Kotak Mahindra, showed tol-

erable credit losses and strong deposit

growth, as perceptions of their strength in-

stilled confidence in customers. The public

banks continue to show far higher levels of

non-performing loans—and a temporary

stay imposed by India’s Supreme Court on

classifying borrowers in default means

that these are likely to be understated.

There are reasons to think that these pro-

blems cannot be ignored for much longer.

The widening gap between the private

and public banks reflects an acceleration of

a long-running trend, says Saurabh Tri-

pathi ofbcg, a consultancy. The state lend-

ers, which were nationalised more than

half a century ago under the socialist ad-

ministrations of Jawaharlal Nehru and his

daughter, Indira Gandhi, still account for

about 60% of all loans. But the handful of

privately run banks set up in the 1990s have

gained market share, and account for most

of the banking system’s innovation and

profit (see chart). Customers’ enthusiasm

for digital banking during the pandemic

has only abetted their rise.

By contrast, the state banks’ record of

poor lending decisions forced the central

government to infuse more than $35bn

into them between 2015 and 2019—more

than it spent on public health in that time.

The pandemic has brought more troubles.

Plenty of loans went unpaid as a result of

the moratorium—fully two-thirds of state

banks’ loans in April, compared with a

third of domestic private banks’ loans. A

chunk of them may never be repaid. The

Reserve Bank of India (rbi) projects that

16-17% of public banks’ assets will be classi-

fied as non-performing by September this

year. That would wipe out even robust in-

stitutions. According to the rbi, at least

four, and possibly as many as nine, banks

will need to be recapitalised.

Keeping these institutions going will

require large new infusions of cash. Their

size and political importance, in doling out

loans to farmers and small firms, means

that letting them collapse is unthinkable.

But from where is the money to come?

Private banks, with their healthy re-

turns and prospects, have been able to draw

on overseas investment over the past year.

Indeed when Lakshmi Vilas Bank, an old

private lender, failed in October, it was

bought by Singapore’s dbsBank. More such

deals could happen. But it seems far-

fetched to imagine that politicians would

let state banks fall into foreign hands—and

also, perhaps, that foreigners would want

to buy them. Several other options are be-

ing discussed—but few are palatable to

both investors and the government.

One idea, which is rumoured to be on

the cards when the government announces

its budget on February 1st, is a roll-up of

state-owned banks into a holding com-

pany, shares and bonds in which would

then be sold to the public. This has the ad-

vantage of sweeping the banks’ problems

into a single, large entity with cohesive

management and an unsullied name—all

attractive to the government but, without a

state guarantee, less so to investors.

Another proposal, from Shaktikanta

Das, head of the rbi, is to set up a “bad”

bank to absorb the rot on a one-time basis.

This would free banks to provide fresh

credit, but it would not prevent more bad

loans building up. An advisory group with-

in the central bank has also floated the idea

of allowing India’s conglomerates to ex-

pand into banking, in order to attract priv-

ate capital. Whatever the benefits, that

raises the possibility of tycoons using de-

posits as a source of cheap funds.

The option deemed most desirable by

analysts and bankers is the least politically

attractive: a thorough flushing of the sys-

tem, beginning with bad debts but extend-

ing to governance. State banks pay low sal-

aries, frequently change their politically

appointed bosses and lend to politically fa-

voured causes. Proper reform would

change all this, say through privatisation.

That has been beyond recent governments,

and the current one seems unlikely to take

on the task. But the post-covid state of the

banks means something must be done. 7

Will the dire state of India’s public-sector banks force the government to act?

Indian banking

Can cannot be kicked further

A very public affair

Sources:ReserveBankofIndia;BostonConsultingGroup;Jefferies

India, commercial banks

15

10

5

0

-5

-10

-15

20181614122010

Financialyears

Netprofit,$bn

Public Private To t a l

All banks

Private

Public

1050 15 20

Grossnon-performingassets,%oftotalassets

Severestress

Sep 2021 forecast:

Medium stress

Sep 2020 Baseline