MUMBAI: Distressed borrowers are taking a toll on the credit profiles of Indian banks with almost half a dozen lenders being downgraded by rating agencies in recent weeks. Given that most public sector banks have similar credit profiles, analysts tracking the banking sector are asking, “Who’s next?”
In the past fortnight, rating agency ICRA has downgraded Central Bank of India, Oriental Bank of Commerce and Union Bank of India, citing rising bad loans and the
high value of restructured loans. Some time earlier in 2012, Moody’s had lowered its credit opinion on Syndicate Bank, Union Bank and Bank of India, again citing rising bad loans.
In a report after the Budget, Mahrukh Adajania of Standard Chartered said that all public sector banks have asset quality issues in the form of huge restructuring pipelines, which are more or less in the same proportion. According to the report, Allahabad Bank, Bank of Baroda, Bank of India, Canara Bank, Punjab National Bank, State Bank of India and Union Bank have restructured loans ranging from 3.5% to 5.9%.
Although they are not classified as defaults, restructured loans are an indicator of the extent of borrowers who find it difficult to meet payment schedules. The report states that the recent Union Budget and higher crude prices makes the operating environment challenging for banks as these two factors have lowered the probability of a rate cut in the near future.
However, private equity firm Avendus Capital has taken a contrarian view. “Even with an assumption of a 20% delinquency in restructured loans, along with the current forecasts for a rise in gross NPAs (non-performing assets), the overall asset quality of public sector banks would stabilize within two years.
It would also stay superior to the current status of European banks,” a recent Avendus report said.
Explaining UCO Bank’s downgrade, ICRA said that the bank’s gross NPAs rose from 2.57% to 3.49% as of December, 2011. It also cited the high level of restructured advances at around 6% of loans and relatively high exposure to weak sectors like state electricity boards, distribution companies and aviation sector. Similarly, in the case of Oriental Bank of Commerce, the level of gross NPAs had risen from 1.95% to 2.92% with restructured loans touching 4.84%. In the case of Central Bank, restructured loans were at a high of 7.4% of advances as of December, 2011 with gross NPAs touching 3.69%.
In the private sector, Fitch Ratings has downgraded Dhanlaxmi Bank and also placed the bank under rating watch. “The action follows a net loss of Rs 36.87 crore for Q3 FY12, and there could be potential further losses,” the rating agency said.