FE Editorial : Banks still in the woods

Jan 22 2013, 00:28 IST
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SummaryWhile India may have earned a breather with Moody’s reaffirmation of the country’s credit rating, the agency’s negative outlook for the banking sector hasn’t changed.

While India may have earned a breather with Moody’s reaffirmation of the country’s credit rating, the agency’s negative outlook for the banking sector hasn’t changed. In November 2011, Moody’s had observed that asset quality would continue to worsen; on Monday, it reiterated its negative stance on the country’s banking sector, opining that delinquencies at public sector banks were yet to peak. Indeed, if non-performing loans (NPLs) aren’t piling up any faster, it is because a large quantum of debt is being restructured. Loans worth a staggering R62,500 crore have been recast by the corporate debt restructuring (CDR) cell between April and December this year, a 100% jump over the previous year. Consensus estimates are NPLs and restructured loans will hit 10% of the total loans by March this year, or more than twice what they were three years ago. While there is merit in helping out borrowers in difficult times, RBI deputy governor KC Chakrabarty has drawn attention to the fact that it is the larger companies that are the main beneficiaries—restructured standard advances for medium and large industries jumped 73% in FY12 and the trend this year too doesn’t seem to be any different.

Such a trend is disconcerting at a time when the entry of big corporates into the banking sector is being discussed. Given the deputy governor’s concern over how banks favour larger corporates and the global history with corporates owning banks—that was behind the IMF and Nobel laureate Joseph Stiglitz’s warnings on this—the government and RBI would do well to keep this in mind.

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