Wither Indian Commercial Bank Loans By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

July 2, 2015 | Posted by bobbysrinivasan << back to blog

The half yearly financial stability report released by RBI on 19^th June 2015 contains facts which are very disturbing. Before we go into the details let us look at some data.

Sector	Share of Bank advances (Loan)	Share in stressed advances (NPA)
Power Generation	8.3%	16.1%
Iron and Steel	4.5%	10.2%
Textiles	3.4%	7.3%
Aviation	0.5%	2.4%
Telecom	1.6%	2.2%
Mining	1.3%	1.4%

Observation

Practically all macro sector companies in the Indian economy are currently carrying huge non-performing assets.
Nearly 20% of all bank advances (loans) are stressed.
Power generation and iron and steel companies are the worst performing sectors.

The data that is provided is based on macro stress tests of 148 scheduled commercial banks as of March 2015. The report indirectly indicates that this is just the starting point of a unfolding story which may contain serious setback stories for our banking industry. Everybody knows that this has not taken place all of a sudden and the growing problem was hidden under a carpet and only now is revealed to the Indian public. First, let us laud the RBI for its initiative for its transparency.

Given this set of data, will these sectors be able to do debt servicing? Perhaps not. Funds may be needed to be diverted to these stressed companies failing which we may see major bankruptcies.

India is probably living in a dream world hoping to meet the Basel III requirements by 2018. It was indicated earlier that atleast Rs. 1 lakh crore must be pumped in to revitalize the bank’s capital. Are the citizens of India going to pay for it by incurring more budget deficits?

Indian budget of 2015-16 itself is a sad story. Nearly 30% all money spent is borrowed. 20 Rs. out of 100 Rs. collected goes toward interest charges. The report also reveals many interesting statistics which when analysed carefully one would conclude that the public sector banks are worst managed.

Let us look some at the data,

Public sector banks recorded the highest level of stressed advances at 13.5% of total advances as of March 2015. For the private sector banks, it is 4.6%.
Falling profit margins and decreasing debt payment capabilities of the corporate sector could add to further misery in the years to come. Dr. Raghuram Rajan of RBI had already expressed doubts about the robustness of our projected economic growth.
The India stock market a gamblers den with a price earning ratio of 22.60 (Sensex 27895, June 26, 2015) is a balloon created by the FII money. As of the March 2015, they had invested or having a stock ownership value exceeding US $ 300 billion (Rs. 19 trillion approximately). It will be a scary scenario that any due to adverse global development (Greece exiting) the money may leave the Sensex which could hurt the rupee value as well. It is not clear how much all these sectors have borrowed outside our country. Collectively our external commercial borrowing is around 200 billion US.

It is not time to blame anybody but to act decisively to set the house in order. In this regard, RBI has done a yeoman job in bringing out the facts.

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