FE Editorial : Banks still in the woods

Written by The Financial Express | Updated: Jan 22 2013, 05:58am hrs
While India may have earned a breather with Moodys reaffirmation of the countrys credit rating, the agencys negative outlook for the banking sector hasnt changed. In November 2011, Moodys had observed that asset quality would continue to worsen; on Monday, it reiterated its negative stance on the countrys banking sector, opining that delinquencies at public sector banks were yet to peak. Indeed, if non-performing loans (NPLs) arent piling up any faster, it is because a large quantum of debt is being restructured. Loans worth a staggering R62,500 crore have been recast by the corporate debt restructuring (CDR) cell between April and December this year, a 100% jump over the previous year. Consensus estimates are NPLs and restructured loans will hit 10% of the total loans by March this year, or more than twice what they were three years ago. While there is merit in helping out borrowers in difficult times, RBI deputy governor KC Chakrabarty has drawn attention to the fact that it is the larger companies that are the main beneficiariesrestructured standard advances for medium and large industries jumped 73% in FY12 and the trend this year too doesnt seem to be any different.

Such a trend is disconcerting at a time when the entry of big corporates into the banking sector is being discussed. Given the deputy governors concern over how banks favour larger corporates and the global history with corporates owning banksthat was behind the IMF and Nobel laureate Joseph Stiglitzs warnings on thisthe government and RBI would do well to keep this in mind.