Indian banks going to get better anytime soon

The toxic-loan pile in Indian banking is set to get even bigger.

After borrowers from the power and steel sectors brought lenders to their knees in the last few years, it is now the turn of telecom, sugar, and healthcare sectors, the weakest performers in the last financial year.

The risk of loan defaults by firms in these sectors is likely to increase, according to corporate credit rating agency ICRA.

“Overall default rates increased to 3.4% in financial year 2018 from 2.6% in financial year 2017, and a further increase in financial year 2019 cannot be ruled out,” said Anjan Ghosh, ICRA’s chief rating officer.

That’s bad news for the country’s banking sector, already saddled with Rs9.5 lakh crore ($150 billion) in bad loans.

Bankers have acknowledged that their exposure to telecom sector has already reached “highly unsustainable levels” —Rs97,681 crore, according to finance minister Arun Jaitley’s statement in July 2017.

The ruinous tariff war since the launch of Reliance Jio in 2016 has knocked out many weak operators, already squeezed dry by expensive spectrum. For instance, after over 15 years of operation, Aircel has filed for bankruptcy.

Besides telecom and sugar, sectors such as healthcare, chemicals, education, mining, ferrous metals, and roads, too, have been under pressure due to a tougher business environment, according to ICRA.

While distressed companies may find it tough to service their loans, a possible rise in interest rates may prolong the recovery, the ICRA report warned. Moreover, banks may turn cautious in the wake of a string of loan frauds and defaults, further capping growth, both for lenders and stressed borrowers.

“It’s likely that banks will change their lending process now to avoid another round of non-performing assets (NPA) or frauds. Therefore, the internal mechanism will get strengthened,” said Siddharth Purohit, research analyst at SMC Institutional Equities. “As a result, a lot of companies that are not performing well will not be able to secure further credit, which may lead to temporary spikes in bad loans.”

On the other hand, the report outlined that auto ancillaries, petrochemicals and polymers, power (mostly renewable energy entities), seafood, housing finance, and non-banking finance companies have shown a marked improvement in their credit quality.