Saturday, April 27, 2013

Can Indian banks stay shock proof?

The Indian banking industry survived the first phase of the global financial meltdown without much damage. But the aftermath of the European crisis and sluggish domestic economic conditions indicate that even Indian banks cannot sit pretty anymore
 
Addressing a meeting organised by the Indian Institute of Corporate Affairs, Union Corporate Affairs Minister M. Veerappa Moily stated, “Indian banks have proved their mettle time and again as their regulations align with international standards, while they remain conventional in approach.”

Although the hagiographic statement of Mr. Moily could be dismissively ignored by critics, the fact is that there is some weight to his view. The top banks that are regularly a part of the B&E Power 100 list have performed relatively well (24 banks in the B&E Power 100 list this year). State Bank of India increased its PAT by 41.66% to Rs.117.01 billion (rank improved by two positions to 3 this year). ICICI Bank saw PAT growth by 25.5% to Rs.64.65 billion (rank improving by two positions to 13). HDFC Bank grew its PAT by 31.6% to Rs.51.67 billion (rank improving eight positions to 15), while Bank of Baroda saw PAT grow by 18.4% to Rs.50.07 billion (rank up by 4 positions to 15).

However, Moily’s eulogy is clearly only one side of the story, as these performances silhouette a larger potential crisis that could hit the Rs.64 trillion (assets) industry, if not nipped in the bud. Indian banks (private & public), which have been high fliers in terms of growth in profits for years, have registered their lowest growth rate for the past six years in the last fiscal. They could grow only by 15% in FY’12 as compared to a 4-year simple average growth rate of 24%. To add to that, the Net Interest Margin (NIM) for the banks has dropped (for private banks from 2.99% in FY’11 to 2.94% in FY’12; for public sector banks from 2.65% to 2.56%). And that comes at a time when the quality of assets itself is a concern. For FY’12, the Net Non-performing Assets (NPAs) of public sector banks, which control the bigger share of the asset pool, have gone up from a 1.01% of total advances in FY’11 to 1.47% in FY’12. But this is just the beginning.

Stressed. That’s the word that describes the industry at this moment, more so for the brisk pace at which the industry’s exposure to Small & Medium scale Enterprises (SMEs) is getting potentially toxic. The seriousness can be well understood from a stress test done by equity research firm Prabhudas Lilladher. As their report suggests, “Valuations for ICICI/Axis (two of the councountry’s strong & leading private sector banks) are approximately 15% lower than their long-term averages after considering a 15-17% hit to book values.” The test on public sector banks revealed a hit of around 30% on book values, given NPA shortfalls and higher restructuring.

More often than not, the SMEs with relatively shallow pockets face the brunt of economic deceleration. SMEs in a large number of Indian sectors like textile, real estate, steel and shipping are losing their debt servicing capacity at a pace that may not be comfortable for banks; more so when they form a sizable part of the latter’s loan book. As per analysts Adarsh Parasrampuria and Parul Gulati from Prabhudas Lilladher, “While interest coverages for small cap companies are back to their 2008-09 levels; for mid-cap companies, it has been below that level for the last three quarters. In case of mid-caps currently, the interest coverage ratio is at a new low of 1.6 compared to 1.9 during 2008-09.” Additionally, around 18% of mid-cap companies are struggling with an interest coverage ratio less than one.


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
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