ndias lenders and their shareholders are playing a dangerous game of hide and seek.To get more news about Expert 24 Trade
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Financial firms need to raise a record amount of capital, something
they would like to do before the central bank‘s Covid-19 moratorium on
repayment ends next month and they have to disclose a big jump in bad
loans. So they have an incentive to pretend that their borrowers have
become miraculously stress-free. Investors know this and are trying to
ferret out bad news. Valuations are sliding, and if policy makers have a
plan for rescuing this vital industry, they’re keeping it close to
In March, the central bank told lenders they could stop collecting
from borrowers for three months after Prime Minister Narendra Modi put a
stop to most economic activity to contain the virus. Since then, the
regulator has extended the timeout by another three months. But as they
announce their June quarter figures, lenders are under pressure from the
stock market to show how most of their customer accounts have become
regular again after the lockdown was relaxed May 10.
Axis Bank Ltd. shares jumped more than 7% in Mumbai on Wednesday after
it said loans under moratorium were down to 9.7% by value from 28% in
May. It wants to raise $2 billion to boost its capital buffers after
S&P Global Ratings cut its debt rating to junk. Non-bank financier
Bajaj Finance Ltd. disclosed that a little under 16% of advances are
frozen, a drop from 27% at the end of April. This improvement, however,
failed to cheer investors because at least some of it came from tweaking
term loans to “flexi” arrangements where borrowers only need to pay
interest for one or two years.
More broadly, analysts are finding it hard to swallow the sudden
unfreezing, given that an average of 38% of the book for mortgage
financiers and 64% for auto lenders was at a standstill in May.
Customers paying just the June installment would get off the list of
accounts under moratorium, “even if they have not cleared the past
dues,” says Elara Securities India Pvt.
Sanford C. Bernstein & Co. analyst Gautam Chhugani has identified
two other strategies. The first is to simply deny deferment requests and
keep auto-debiting customer accounts. The other method is to help
wobbly borrowers with fresh funds, so “the underlying health of the loan
won't be known for a long time until 2021,” he says.
The pandemic has given banks tools to do this. Lenders have approved
$17 billion out of a $40 billion state-guaranteed small-business credit
program. Media reports suggest part of the money has gone to borrowers
on the condition that they repay old loans. Shadow banks, especially
ones exposed to troubled property developers, are hawking new bonds.
Banks can use the monetary authoritys funding-for-lending program to buy
the notes. Here again, they want financiers to keep servicing existing
At $1.4 trillion, advances by India‘s top banks and other lenders are
broadly unchanged from a year earlier. While stagnation in loan growth
is only to be expected in a shrinking economy, what’s also worrying is
that financiers accounting for three-fifths of the credit are being
judged by investors to be worth less than their assets. Its a sharp
deterioration from a year ago, when 40% of institutions by total loans
were trading below book value.
Dismal valuations will stop many state-run banks from joining the
fund-raising party, which may top $10 billion this year, almost double
the record $5.2 billion in 2017. The government must come to the rescue.
Economists at State Bank of India suggest lowering the minimum capital
norm to 8% from 9% of risk-weighted assets, and deferring the rainy-day
capital conservation buffer.
Those two measures will save almost $40 billion. That's not enough
capital. Delinquent corporate debt, which was weighing India down even
before the coronavirus, is getting heavier. India Ratings and Research
Pvt., a Fitch Ratings affiliate, has pegged additional loan-loss costs
from 500 heavily indebted firms at $30 billion, a conservative estimate
because bankruptcy courts aren‘t taking new cases and asset buyers are
looking to wriggle out of commitments. To this, add the post-Covid slide
in small firms’ fortunes, as well as losses on micro credit and other
Even if a bad bank is set up to take problem loans out of the
financial system, the discounted price at which it will buy them means
that private capital will have to absorb chunky losses. No amount of
gloss by bankers can hide the stress for too long. The market will
eventually find it.