Regulator unearths nearly $7 billion worth bad loans at big PSU banks

Hidden bad debt is a blow to the banking sector sector given that half of India’s 22 state-run banks are already under the RBI’s strict Prompt Corrective Action program that restricts lending and expansion.

Bad loans at India’s five biggest state-run banks were about Rs 456.8 billion ($6.8 billion) more than the lenders had assessed.

A man walks past the signboard displayed at the State Bank of India main branch in Mumbai.(Reuters File Photo)

Audits by the regulator for the year ended March 31, 2017, revealed the discrepancies, triggering large losses as the banks increased provisions. If you add IDBI Bank Ltd., which doesn’t feature among the biggest but got the largest chunk of a public bailout, the figure rises to about $8.3 billion.

Hidden bad debt is a blow to the sector given that half of India’s 22 government-controlled banks are already under the Reserve Bank of India’s strict Prompt Corrective Action program that restricts lending and expansion. Asset quality may worsen as tighter regulations kick in this year and stress rises in the crucial power sector.

A few of the banks undergoing PCA may find it hard to survive, the RBI’s former deputy governor SS Mundra told BloombergQuint. That increases reliance on loan recoveries from India’s new bankruptcy process, which reported its first big success this month but is running behind schedule amid multiple legal and logistical challenges.

Shares of Bank of India, which became the latest to report the divergence, slumped 5.7% as of 9.30 a.m. in Mumbai on Tuesday. Loss tripled to Rs 39.7 billion for the quarter ended March 31, 2018, from Rs 10.5 billion a year earlier, the lender told the stock exchange late on Monday.

Bank of India now needs a “favourable outcome” -- loan recoveries of about 50% -- from the bankruptcy process, Ravikant Bhat, an analyst at Emkay Global Financial Services Ltd., wrote in a note to clients. With conflicting reports on likely outcomes for the so-called ‘dirty dozen’ large delinquent firms undergoing the process, “our estimates continue to factor in higher haircuts,” he said.

BANK DIVERGENCE

Banks	Divergence (in billion rupees)
State Bank of India	232.4
Punjab National Bank	22.1
Bank of Baroda	29.2
Canara Bank	32.5
Bank of India	140.6
IDBI Bank	102.8