Saturday, 23 August, 2008
AFTER BEING in denial since the beginning of the current financial year, bankers have begun acknowledging that rising bad loans will pose a huge challenge in the next few years. Some are already seeing a rise in delinquencies. Meera Sanyal, India head ABN Amro Bank, agreed there has been a recent increase in delinquencies for the bank in the personal loan and credit card business. “But I would still say the medium-term outlook remains positive,” Sanyal said on the sidelines of a banking conference. Naina Lal Kidwai, country head for HSBC India, agrees: “There could be delinquencies in credit cards, consumer finance and personal loans and mortgages. Retail loan growth in India could also slow down and I would agree this is not a good sign,” says Kidwai.
The culprit is rising interest rates: they have increased the possibilities of defaults, particularly among customers who hold credit cards. Banks across India, fearing higher defaults, have already stopped or tightened lending norms for consumer finance and auto loans. ICICI Bank, the leader in retail lending in India, is actually expecting retail lending this year to grow 5 to 10 percent after witnessing a dizzy growth in the last five years. Chanda Kochhar, joint managing director and chief financial officer, ICICI Bank, said corporate credit growth will do better at 16 percent.
She also denied that higher interest rates will have an impact on the bank's loan portfolio. “Business growth for the industry may be impacted, but not ICICI’s loan quality,” Kochhar said. However, the bank’s bad loans have seen a marginal rise: its net non-performing assets have increased to 1.74 percent of total assets in the quarter ended June 2008, from 1.33 percent during the same period last year.
Financial market analysts say that bad loans across the country will be a major challenge for domestic banks even as regulators propose to ease norms for foreign banks operating in India in 2009. “The impact will be felt. I guess we will have to go through some pain because the right processes were not followed earlier,” says Ravi Trivedi, executive director, business advisory services, at audit giant and consultant KPMG.
Trivedi, as an example, cites the fact that financing for household goods has more or less stopped. “If these goods are not sold, their makers face losses because they have invested a lot in producing them and it is not a good sign. In short, the banks can’t avoid the bleeding.” The Reserve Bank of India (RBI) has to hike rates if inflation is at 12 percent. People who had taken a loan of Rs 50 lakh at seven percent interest two years ago, are now paying 14 percent.”
And some of the effects of the RBI’s hikes are already being felt: State Bank of India (SBI) reported the slowest profit growth (15 percent) since the last two years and ICICI Bank Ltd’s earnings fell for the first time in more than five years, as rising interest rates caused more losses on bonds and loan defaults. In Mumbai trading, ICICI Bank posted a 6.1 percent drop in profit in Q1.
SBI chairman Om Prakash Bhatt has told board members that he wants to boost sales of mutual funds and insurance after their fees pushed profit margins. But ICICI Bank, slower to expand outside its mainstay retail lending business, is at a larger risk.“ICICI is clearly more exposed to market risks than SBI, so it may have to wait for improvement in the country’s macro scene before getting back to its past growth rates,” remarks Vaibhav Aggarwal, an analyst at Angel Broking.
But with rates still to top out, that isn’t likely. RBI, which raised the benchmark interest rate nine times since the start of 2006, is trying hard to cool inflation. “We need to tighten our monetary policy but then, that's bad news,” avers Arun Kejriwal, head of research firm KRIS. Confirms Kochar: “Every interest rate and inflation rise will impact us. We have to keep watching.” That is not good news for the consumers.
Source: http://www.tehelka.com