India’s private banks could be staring at another bad loan mess

Trouble piling up.
Trouble piling up.
Image: REUTERS/Vivek Prakash
We may earn a commission from links on this page.

India’s private banks may soon be visited by ghosts of the past.

With the pandemic and the ensuing lockdowns disrupting the Indian economy and businesses, the country’s private banking system may be hit by a fresh bad loans mess, according to a recent report by UBS Global Research. Between 6% and 16% of the loan books of India’s top five private banks are made up of “vulnerable” companies, the report said.

UBS Global Research categorises “vulnerable” companies as those that are rated BBB or below (considered as moderately risky before Covid-19) or ones that have an operating profit to interest expense is less than 2x.

Of the top five private banks, Kotak Mahindra Bank and IndusInd Bank have relatively higher exposure to such companies.

Bad apples

These corporate bad loans will only add to private banks’ growing worries. They have sizable exposure to other vulnerable segments like self-employed and micro small and medium enterprises, which are the worst victims of economic downturn.

S&P Global Ratings predicts that Indian banks’ NPA-to-loan book ratio could spike by around 50% in the current fiscal year.

Double whammy

Banks will be forced to set aside money as a cover in anticipation of a fresh set of bad loans, hurting their already dwindling profits, which were under pressure due to weak credit demand and economic slowdown even before the spread of Covid-19.

Now, the profits are expected to shrink further due to the rising bad loans, reduction in loan growth and fee income.

In a bid to avert a fresh mess of bad loans, India’s central bank is reportedly chalking out a one-time loan restructuring scheme. This will provide relief to borrowers as well as lenders and hopefully reduce the scale of corporate defaults.

While the Reserve Bank of India stitches a rescue plan, it’s clear that India’s private banks won’t be able to wriggle out unscathed.