India Bad Loan Ruling Weighs as Banks Retreat Across Asia
A customer talks on his phone as he exits a State Bank of India branch in Patna. (Photographer: Anindito Mukherjee/Bloomberg)

India Bad Loan Ruling Weighs as Banks Retreat Across Asia

India’s biggest banks were among the worst performers after a top court’s decision that forces lenders to resume classifying bad debt added to concerns about the global economy’s reopening.

Top lenders State Bank of India and ICICI Bank Ltd. fell more than 2% each, compared with a 1.2% drop in the Sensex. The Bankex gauge ranked near the bottom among 19 sector sub-indexes on Wednesday. Cyclical stocks, including financials, were under pressure across Asia amid concern about progress in restarting world activity after the pandemic.

“The decline in the bank shares in India was in line with Asian peers,” said Gaurav Garg, head of research at CapitalVia Global Research Ltd. “The losses got compounded by the Supreme Court’s order, which has led to concerns that soured debt might rise, leading to investors staying cautious.”

The Supreme Court on Tuesday reversed a ban on lenders from marking loans, over-ruling the Reserve Bank of India’s order to end the relaxation last August. It also ruled that banks won’t be able to charge borrowers for additional interest on loans incurred during a six-month repayment holiday last year. That may cost lenders an extra $1 billion, according to Anil Gupta, vice-president of financial sector ratings at ICRA Ltd., the local arm of Moody’s Investors Service Ltd.

It remains unclear who ultimately will foot the bill and whether the government will step in and provide more help to banks. The total amount for the waiver of accumulated interest is estimated at $2 billion of which Prime Minister Narendra Modi’s administration has already promised to bear about $900 million for loans up to 20 million rupees.

The top five lenders State Bank of India, HDFC Bank, Bank of Baroda, ICICI Bank, Punjab National Bank who hold about half of the $1.8 trillion financial sector’s loans will have to refund $500 million, while the rest will mainly be spread among more than 50 local banks and shadow lenders. Still, this is a small amount compared with their combined annual operating profit of more than $28 billion, according to ICRA’s Gupta.

The ruling has also removed some of the uncertainty on the profit outlook of the nation’s biggest banks.

“The hangover of all the uncertainties related to bad loan classification, loan holiday is now over which will give investors clarity on banks’ earnings and growth,” said Siddharth Purohit, an analyst at SMC Global Securities Ltd.

The Reserve Bank of India expects that roughly 13% of outstanding loans at local lenders could turn sour by September, which would be the highest level since 1999.

©2021 Bloomberg L.P.

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