NewsMoody’s downgraded State Bank of India’s rating to D+ from C- in October. How bad will things get for India’s banks? It depends on who you ask.
Moody’s downgraded the outlook for the entire sector Wednesday from “stable” to “negative,” setting off a selling spree on Dalal Street that left Indian markets as one of Asia’s worst performers on Wednesday.
“India’s economic momentum is slowing because of high inflation, monetary tightening, and rapidly rising interest rates,” Moody’s wrote. Borrowers will be late on loan payments or not make them at all, and profitability will come under pressure in the sector over the next 12 to 18 months, the rating agency said.
Rival ratings agency Standard & Poor’s did the opposite on Thursday, assigning Indian banks a rating of 5 on its Banking Industry Country Risk Assessment, or BICRA, an improvement from a rating of 6. A rank of 10 represents the highest risk on the BICRA scale, so India’s banks moved up a notch, to the same economic risk as those in China, Turkey and Portugal. “We consider the lending and underwriting standard to be moderately conservative,” S&P wrote, and sector concentrations and currency risks low. Whether you see the glass as half full or half empty, there’s little question that the strength of India’s approximately $1.3 trillion banking system is about to be tested.
The financial system in India is dominated by state-run banks, which control about 75 percent of the market’s assets. They, with their commercial banking counterparts, lent aggressively to the nation’s fast-growing companies, infrastructure projects and private-public partnerships during the recent economic boom years. Corporate lending increased by 21 percent a year in the last fiscal year, even as signs of a slowdown were showing.
The bank lending system now needs to weather a nasty storm, a growing number of analysts and economists say. “We haven’t seen the worst. We haven’t even seen the beginning of the worst,” said V. Krishnan, a bank analyst with Ambit Capital in Mumbai who downgraded State Bank of India, India’s largest bank with a 1.2 trillion rupee ($24 billion) market capitalization, to “sell” in August.
Conditions will be “meaningfully bad for the entire economy,” predicts Mr. Krishnan, and companies will be unable to pay back bank loans. “Corporates are bleeding operationally, and they have less and less money to service their debt obligations,” he said.
Paradoxically, the bad times to come are in part the government’s own making. While negative global economic conditions present a bleak backdrop, analysts and businessmen say that some of the immediate loan problems can be traced to a paralyzed central government, corruption-related losses, sector blowups and misguided policies that have left even decently performing companies at the mercy of the whims of various government agencies.
Essar Energy said in August that three projects were being delayed over regulatory clearances, sending the company’s value plummeting, Kingfisher Airlines is teetering on the brink of bankruptcy, in part, its founder says, because of the government’s continued support to state-run Air India, and United States electricity producers AES said this month it will scale down in India after failing to get planned projects off the ground, worsening confidence in India’s power sector.
On Friday, the government announced that India’s industrial growth rate fell to its lowest rate in two years. “Indian policy makers can at times be their own worst enemies,” said Rajeev Malik, senior economist with CSLA Singapore, a research firm. There is a saying in India that applies here, Mr. Malik said. The English translation is “to use the ax on one’s own foot,” he said. If things go very bad for India’s banks, rating agencies do agree on one thing – the Indian government, which helped to create the mess, will be forced to help clean it up. “We classify the Indian government as ‘highly supportive,’” Standard & Poor’s wrote Thursday. “The government is likely to provide timely financial support to the banks, if needed.”
Moody’s concurs. Moody’s “expects the government to remain committed towards providing support to both public and private banks,” the rating agency wrote.
