The sight of Rana Kapoor, one of India’s highest-profile bankers, being taken to a Mumbai court in his tracksuit in early March augured what has become a very bad month for the country’s banking sector.
Mr Kapoor was arrested and accused of taking kickbacks only days after Yes Bank, the lender he founded in 2004 but left last year, was taken over by the country’s central bank amid concerns it would not survive a deterioration in its loan book. Mr Kapoor, who denies the allegations, was sent to custody.
To save Yes Bank, the authorities cobbled together a rescue plan that saw a range of big-name Indian lenders led by the State Bank of India (SBI), the country’s largest, infuse funds in return for an equity stake. The episode came as a jolt to investors, who worried it could exacerbate vulnerabilities in the financial system.
But the challenges now facing India’s banking sector have reached another order of magnitude due to the coronavirus threat, and investors have made it known by dumping equities. Bank stocks have been among the hardest hit.
The National Stock Exchange’s Nifty Bank index has fallen about 41 per cent so far this month, outpacing the 26 per cent rout in the broader Nifty 50 gauge. Shares of large private lenders such as Axis Bank and IndusInd Bank have lost at least half of their value over the same period.
From public-sector behemoths to a mushrooming collection of private outfits, India’s banks have for years worked to beat down mounting piles of bad loans of the sort that felled Yes Bank. The ratio of gross non-performing assets at Indian banks rose to 11 per cent in 2018 from about 2 per cent a decade earlier, before starting to ease off.
The Reserve Bank of India (RBI) had already estimated that the nation’s economic slowdown would mean that figure would edge back up. But traders are now betting that events of the past month, culminating in a decision to shut down large parts of the country in response to Covid-19, could knock any recovery off course.
“The economy was already bad. Perhaps it was showing some signs of shaky stability, now we have this full blown impact of coronavirus. Where do we go from here?” said Saswata Guha, India financial institutions head at Fitch Ratings. “It looks quite bleak.”
This extra strain was partly collateral damage from the Yes Bank intervention. Some skittish depositors at a handful of smaller private banks pulled their money, betting that it would in future be safer in the state-backed giants that dominate the sector, such as SBI.
Another blow was self-inflicted. Before the dust settled on Yes Bank, the Supreme Court ruled that telecom operators must pay dues worth billions owed to the government. That caused panic-selling in bank stocks due to their heavy exposures to the telecoms sector. Vodafone Idea, the UK telco’s local venture, has already said such a move could force it out of business — which in turn would cause instant damage to creditors such as IndusInd or IDFC Bank, whose shares have also dropped sharply this month.
Now India’s banks are facing the dire challenge of the viral outbreak. In a Tuesday night address to the nation, Prime Minister Narendra Modi announced that India would embark on a 21-day lockdown to keep people in their homes and leave only essential businesses running. Banks now face the prospect of lower corporate loan growth and a swift uptick in losses.
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Yet the biggest risk of all, analysts say, is that the prolonged shutdown starts to sour what had previously been considered a safer bet: retail loans, which according to Nomura make up 28 per cent of banks’ exposures.
Those loans were seen as better protected from the risky or bad decisions that tainted lending to Indian conglomerates, but the prospect of lost jobs and small business closures as more than a billion Indians stay at home could change that equation.
“What we really do not want is when you start to see cracks in the retail book,” said Gaurav Arora, head of Asia-Pacific banking at Greenwich Associates. “The market is pricing in the fact that with everything slowing down, people are going to be laid off . . . they might not be able to get liquidity and pay off the debt that they have.”
In order to withstand the shock, banks have sought relief measures, including a call for the RBI to relax rules that require them to classify an unpaid loan as non-performing within 90 days.
More will be needed. As Indians settle in for three long weeks of curfew, it is now clear that the long-awaited recovery of the country’s banking sector is in deep jeopardy.