Bad loans in banks could trigger downgrade

MUMBAI: Bad loans in banks might be the susceptible spot in India's economy and may just possibility triggering a long term downgrade. Besides the standard dangers to the economy coming up out of fiscal slippage and from international volatility, Moody's has cited health of the banking device as vulnerability for the economy.

According to Moody's, recapitalization of PSU banks and proactive steps to get to the bottom of dangerous loans are beginning to address a key weakness in India's sovereign credit score profile. SBI chairman Rajnish Kumar stated that large NPA accounts referred to the National Company Law Tribunal in July would arise for resolution in January 2018.

Bankers, then again, say that since those are the primary transactions the bankruptcy procedure is prone to get examined. Most bankers feel that dangerous loans will start declining only from the next financial year. Banks also are reluctant to take more defaulters to the National Company Law Tribunal as regulations require that they make 50% provisions on loans in respect of which bankruptcy lawsuits have been initiated. There have been experiences that the government might force banks to begin insolvency lawsuits towards more debtors.

Besides having to make high provisions, if banks don't get acceptable bids all through the insolvency procedure, they'd be required to begin liquidation lawsuits. If this occurs banks may well be required to make huge write- down in their loans.



The 3rd uncertainty is over financial institution mergers. According to market avid gamers, traders are reluctant to make large bets on financial institution stocks over fears that govt might decide to merge susceptible banks with some strong banks. Given that public sector banks wouldn't have the versatility to clean up their books there may be concern that merger with a susceptible financial institution would hurt the stronger financial institution.

"While the capital injection will modestly increase the government's debt burden in the near term (by about 0.8% of GDP over two years), it should enable banks to move forward with the resolution of NPLs through comprehensive write-downs of impaired loans and increase lending gradually," Moody's stated.

According to Care Ratings, gross NPAs of 36 top banks have increased from Rs 2.94 lakh crore in March 2015 to Rs 3.32 lakh crore in Sept 2015 after which sharply to Rs eight.38 lakh crore in Sept 2017.


"The next two quarters would be crucial from the point of view of NPAs as it is still not clear whether or not they have been fully recognized and provided for. Private Banks too have witnessed an increase in their NPA ratios and the final picture will emerge by March 2018," stated Madan Sabnavis, chief economist, Care scores in a document on Friday.


According to Bloomberg information, Indian firms and banks have bought $12.five billion of foreign-currency bonds thus far this year with a fourth of them coming from banks. Bankers stated that the improve would also draw more traders into those bonds as the earlier rating used to be the lowest above-investment grade. Many pension finances, that are mandated to spend money on only investment-grade securities, keep away from bonds that are at the fringe of investment grade.


SBI chief economist Soumya Kanti Ghosh stated, "The ratings upgrade will have a profound impact on bond yields and lift the morose sentiments in the bond market, apart from impacting the movements in the domestic currency. The greatest irony is that despite India's improved fundamentals, bond yields have moved in a contrarian direction. For example, if we compare India's bond yield from the levels of 2008, it is highest among select economies. India's bond yields are around 170 bps higher than the 2008 level."


Bad loans in banks could trigger downgrade Bad loans in banks could trigger downgrade Reviewed by Kailash on November 18, 2017 Rating: 5
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