India’s “Big Bang” burst of economic reforms is barely off the ground, but its largest banks are betting that a turnaround may already be underway, belting out fresh loans for expansion projects that could help to fuel a recovery and uncork credit across the country.
A confederation of India’s biggest public banks backed two whopping loans for a pair of debt-wracked industrial titans: the equivalent of 350 billion rupees ($6.6 billion) to Tata Steel and 98 billion rupees ($1.9 billion) to aluminum roller Hindalco Industries. The loans, to finance a steel plant and aluminum smelter, were India’s largest in this year, Mint reported, calling them “harbingers of change” in an otherwise stalling economy.
Indian companies have seen debt troubles soar in recent months, with non-performing assets and debt restructurings soaring. The country’s comparatively shallow securities markets only make Indian companies more dependent on banks, loading them up with burdensome loans that would be unnecessary if they could more easily tap public markets. Many larger corporations have sought to raise capital with dollar- or euro-denominated bond issues abroad—only to be pummeled as the rupee slid some 15% between February and June, inflating the real cost of their debts. European banks have furthermore cut back lending.
The ‘Big Bang’ came two weeks ago with Prime Minister Manmohan Singh’s surprise unveiling of India’s most sweeping economic reforms in decades, which will open the media, aviation and retail sectors to increased foreign investment; put stakes in four major oil and mining companies on the block; and cut diesel subsidies to narrow the fiscal deficit, which had led ratings agencies to threaten their first-ever BRIC downgrade to junk.
The rupee has since strengthened by 5%, although Mumbai’s benchmark Sensex stock index has gained less than 2%. Ratings agencies voiced doubts that the plans could in fact be implemented, with Fitch today cutting its 2012 growth forecast for India to 6% from 6.5%. But in Mumbai, banks appeared to bet the bang would become a steady beat.