The Indian banking sector is facing rising non-performing and restructured loans, which is partly a legacy problem following the closure of a large number of private infrastructure projects. This was compounded by credit lines with steel and commodity based companies that encountered difficulties.
The RBI noted that in September last year, stressed assets constituted 14% of India’s total banking sector, whilst in state owned banks stressed assets amounted to 17% of the sector’s total lending, with 6.2% of loans classed as non-performing.
The Central Bank is now putting pressure on these banks to clean up, recognise these loans and restructure them, the deadline for which is March 2017.
According to the IIF, the RBI has rolled out a number of financial sector liberalisation initiatives whilst tightening bank exposure limits for large firms.
However, an additional problem of an historic overreliance on bank financing is that the corporate space remains largely underdeveloped.
Despite a large drive to limit bank financing and increase participation in the country’s corporate bond market in recent months, the deputy governor of the RBI Rama Ghandi noted at a recent seminar that bank financing should not be overlooked in developing the country’s corporate bond market.
Banks are already relatively risk averse in their corporate risk exposure and have shifted their remit to focus on consumer loans, for which there is demand alongside lower leverage and risk. Coupled to this, there is a reduced demand for bank loans from the corporate side.
Bejoy Das Gupta, chief economist for Asia Pacific at the IIF said that with banks becoming more risk averse and reducing their expose to corporates, healthy companies should naturally turn to the local bond market.
“Bank lending will not be ignored completely. There will be a slight rebalancing.”
The corporate bond market has previously been sparsely used by Indian entities because they do have to pay a slight premium, although for larger corporates this should become less of an issue.
“Corporates that can borrow from the domestic bond market should do so, especially now that there have been reforms liberalising corporate access to foreign financing by allowing them to issue rupee bonds externally.”
HDFC and Indiabulls Housing Finance both raised Rs3,000cr and Rs1,350cr respectively in July, and other masala bonds have been planned by NTPC, Fullerton India Co, the National Highways Authority and the Rural Electrification Company.
However Das Gupta noted that these instruments have yet to take off. The government has been trying to develop the local corporate bond market for some time, and although it is improving unresolved taxation issues and a fairly thin secondary market are inhibiting its growth.
High levels of government borrowing crowd out private liquidity; regulatory restrictions on the investment mandates of financial institutions; and the absence of a well-functioning bankruptcy code are some of the key factors weighing on the development of the corporate bond market.
