Indian two thousand rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Regulator Unearths $7 Billion of Bad Loans at Big Indian Banks

(Bloomberg) -- Bad loans at India’s five biggest state-run banks were about 456.8 billion rupees ($6.8 billion) more than the lenders had assessed.

Audits by the regulator for the year ended March 31, 2017, revealed the discrepancies, triggering large losses as the banks increased provisions. If you add IDBI Bank Ltd., which doesn’t feature among the biggest but got the largest chunk of a public bailout, the figure rises to about $8.3 billion.

Hidden bad debt is a blow to the sector given that half of India’s 22 government-controlled banks are already under the Reserve Bank of India’s strict Prompt Corrective Action program that restricts lending and expansion. Asset quality may worsen as tighter regulations kick in this year and stress rises in the crucial power sector.

India’s power sector is emerging as a key risk for the nation’s banks:
  • 75GW Power Projects Risk Bankruptcy on New Norms: Lobby
  • Power Ministry Seeks Relaxed Rules for Stressed Assets in Sector
  • India’s REC Preparing Plan for Stressed Power Assets: Chairman

A few of the banks undergoing PCA may find it hard to survive, the RBI’s former Deputy Governor SS Mundra told BloombergQuint. That increases reliance on loan recoveries from India’s new bankruptcy process, which reported its first big success this month but is running behind schedule amid multiple legal and logistical challenges.

Shares of Bank of India, which became the latest to report the divergence, slumped 4.4 percent as of 1 p.m. in Mumbai on Tuesday. Loss tripled to 39.7 billion rupees for the quarter ended March 31, 2018, from 10.5 billion rupees a year earlier, the lender told the stock exchange late on Monday.

Bank of India now needs a “favorable outcome” -- loan recoveries of about 50 percent -- from the bankruptcy process, Ravikant Bhat, an analyst at Emkay Global Financial Services Ltd., wrote in a note to clients. With conflicting reports on likely outcomes for the so-called ‘dirty dozen’ large delinquent firms undergoing the process, “our estimates continue to factor in higher haircuts,” he said.

BANKDIVERGENCE (Billion rupees)
State Bank of India232.4
Punjab National Bank22.1
Bank of Baroda29.2
Canara Bank32.5
Bank of India140.6
IDBI Bank102.8

©2018 Bloomberg L.P.