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Sometimes Even When You See Something Clearly, You Think It Wise to be Indirect |
Just when I was recovering from The National Bank of
Ukraine’s festival of euphemisms about PrivatBank, along come Moody’s and its
Indian affiliate ICRA to once again remind AA that his attempts are easily
upstaged.
In a report
released on 9 January, Moody’s and ICRA summarize their conclusions about
the country’s banking sector with the phrase “see subdued prospects for India's
banks“.
Why is AA “skeptical” and inclined to a stronger term than
“subdued”? Perhaps “dismal”?
Three factors.
First, Indian banks—particularly public sector banks or PSBs—have
a reputation for under-reporting NPAs. Favorite techniques were refusal to recognize
NPAs, disguising bad loans via restructuring and/or making new loans to pay
interest on past due loans. Former RBI Governor Raghuram Rajan launched a
“crackdown” in 2015 to curb under-reporting of NPAs.
Second, Indian banks have also traditionally under-reserved their
declared NPAs with provisions averaging roughly 40% of total NPAs. According to RBI
Handbook of Statistics of the Indian Economy Table 65, 2015 reserving
levels were at 46%. Unreserved NPAs
were some 20% of 2015 capital (Table 64).
It’s hard to tell what happened in 2016. Much higher provisions were taken, but more
loans were recognized as NPAs and restructured loans are now to be included in
that figure. What’s the net effect?
Sadly, RBI data on NPAs is available with a roughly 12 month
lag. See Table 65 in the RBI’s “Handbook
of Statistics”. Latest figures are
from September 2016. Other RBI
reporting has detailed bank-by-bank analysis but the latest data appears to
be March 2016.
Without RBI statistics on both NPAs and provisions, it’s not
possible to determine if the provision coverage has increased because both NPAs
and provisions have increased.
What this means is that recoveries are unlikely to make up
provisioning shortfalls to any meaningful extent. Provisions then are more critical than in
jurisdictions where average recoveries are in the 40 to 50% range.
It’s hard for AA to imagine that during 2016 Indian banks cured
decades of bad practice and bad underwriting.
Trump Tower like Rome wasn’t built in a day, though it is by some
Twitter accounts better. And banking sector
cleanups generally take more than a single year.
Moody’s/ ICRA seem to agree. In their press release, they
project single digit ROE for 2017 and 2018 and note large capital needs
particularly among PSBs.
And finally a tip of AA’s enormous tarbush to ICRA SVP
Karthik Srinivasan for combining “dent” with “profitability matrices”. See link to Moody’s / ICRA press release.
Shabash!