Why The Government Had To Step In To Support India’s Exim Bank

The bad loan mess on the books of India’s listed public sector banks is now well documented. But far lesser attention has been paid to the troubles brewing in another government owned lender which plays a crucial role in the economy — the Export Import Bank of India or Exim Bank.

On Wednesday, the government committed to infusing Rs 6,000 crore into the bank over two years and agreed to double its authorised capital to Rs 20,000 crore.

Rating agencies and the Reserve Bank of India have raised concerns over this deterioration in the bank’s financial position, which finally led to the government providing more capital.

David Rasquinha, managing director at Exim Bank declined to speak to BloombergQuint. An email sent to the bank’s spokesperson was not answered.

How Did It Get To This?

Exim Bank, a wholly-owned government bank, was set up in 1981 to provide financial assistance and investment credit to exporters and importers. It also acts as the government’s official export credit agency.

As part of its primary focus on the export-import sector, Exim Bank also lends to corporates building out export oriented facilities. Some of this lending happens directly while some of it is routed through other domestic lenders.

Between 2008 and 2013 Exim Bank loaned heavily to large corporates which were building export facilities. This included loans of Rs 9,139 crore to companies currently undergoing insolvency proceedings. As the bad loan clean-up began, Exim Bank saw gross non performing assets rise from 2.9 percent in March 2015 to 10.37 percent at the end of March 2018. This ratio rose further to 12.93 per cent at the end of September 30, 2018.

According to an investor presentation made by the bank after the September 2018 quarter, 60 percent of its gross NPAs are due to the downturn across domestic industries, 17 percent are because of global factors and 12 percent are attributable to cost and time overruns across projects.

Should a bank which is intended to support the many small and medium export oriented units in the country have taken on such large corporate exposures? While this is within the bank’s permissible mandate, it has proven to be an imprudent strategy.

Risks Beneath The Surface?

Apart from the risk that emerged from large corporate lending, a break-up of the bad loans across other business segments shows that stressed assets have built up across most portfolios.

For instance, in the pre and post shipment credit segment, the NPA ratio is hitting nearly 50 percent. Such credit facilities are typically short term in nature. The import finance and buyer’s credit segments also have high bad loans.

While risks have emerged in a number of Exim Bank’s business segments, the bank benefits from loans given under government guarantees. These make up a third of the bank’s books.

Loans under bilateral government-to-government programs benefit from an explicit credit guarantee from the government, pointed out a note issued by rating agency Moody’s Investors Service in June 2018. Moody’s added that for loans to banks in India, Exim Bank assumes the credit risk associated with the bank and not that of the underlying exporter.

Surge In Leverage

As bad loans were recognised, Exim Bank was forced to step up provisioning, which led to large losses.

The bank reported a net loss of Rs 2,923.7 crore in 2017-18 as against a net profit of Rs 41.21 crore in 2016-17. For the half-year ended September 30, 2018, the bank reported a net loss of Rs 507.92 crore.

The bank’s ‘Capital to Risk Assets Ratio’ had fallen to 10.35 percent as of March 2018, which is below the regulatory requirement of 10.875 percent.

It’s net worth has also fallen which pushed up the leverage ratio to over 17 times.

Course Correction

In May 2018, Exim Bank presented a road map to the RBI and the government to bring its leverage back to acceptable levels, according to rating agency reports.

According to ICRA, based on the projected profits of the bank, it would have taken at least three to five years to correct the leverage ratio. Therefore, the leverage ratio of the bank would have fallen back within regulatory limits only by FY2022.

The bank had suggested in its roadmap that it would not take any fresh loans or borrow more. Instead, it would lend only to the extent of the repayments it received from the existing borrowers, said ICRA. This plan would have constrained the ability of the bank to lend and could have strained the export-import sector as well.

It is not known whether the RBI approved or rejected the plan.

The government’s capital infusion, the largest for the bank in the last 10 years, will speed up the process of cleaning up Exim Bank’s books, thereby ensuring that lending activity to an economically important sector is not compromised.

“The infusion of capital into Exim Bank will enable it to augment capital adequacy and support Indian exports with enhanced ability,” said the government in its release dated Jan.16.