In an interview with Bloomberg on Tues (8 Dec), India’s Finance Minister Nirmala Sitharaman praises the Reserve Bank of India (RBI), the country’s central bank, in its efforts to rescue Lakshmi Vilas Bank (LVB) by allowing the foreign owned DBS Bank India to buy the failed lender (“DBS Buyout Shows India Banking Sector Is Opening, Minister Says“).
The unprecedented takeover of a private Indian bank by a foreign competitor signals that the nation’s banking sector is opening up, she added. “That only sends the right message that Indian banking sector is being opened up,” she said.
The Chennai-based LVB is one of two banks to be rescued this year as India’s financial industry reels from one disaster to the next. A shadow banking crisis in 2018 and now the pandemic-fueled recession have hurt banks’ asset quality and capital, hampering their ability to lend.
To prevent the financial system from melting down, RBI took the rare step of arranging the bailout of Yes Bank Ltd by state and private-sector lenders in March, followed by DBS’s deal to buy LVB last month.
Prime Minister Modi’s government will also go ahead with privatizing a couple of state-run banks that have received cabinet approval, Sitharaman said. “We shall look forward to having more interest in private-sector banking that sends a message that in fact we are open for a healthy banking system,” she added.
India’s banks among most unprofitable in world
Yes Bank and LVB are not the only 2 banks in trouble. Other banks in India have also been reported to be not in a good shape.
Of the world’s major economies, India’s banking sector warrants the most concern because it entered the pandemic already in very poor shape. The pandemic further exacerbates the problems. Many Indian banks were already saddled with high shares of non-performing loans (NPL) and low regulatory capital ratios by international standards before the pandemic hit.
“[India’s banking] sector is entering a slow-burning crisis, where bad debts will eat into profits and restrict lending, holding back the recovery throughout the decade,” said economists Shilan Shah and Simon MacAdam from consultancy firm Capital Economics.
Around the world, banks are set to pick up a greater share of the costs of the Covid-19 crisis as governments scale back policy support, but this is not expected to lead to full-blown banking crises in most countries because of ongoing central bank support and relatively low burdens of household debt. The exception is India, according to Capital Economics.
India’s banks are among the most unprofitable in the world. Missed payments by debtors, high loss provisions and high costs for managing a ballooning portfolio of impaired assets meant that almost half of India’s banks were loss-making last year.
“It would not take much for loss provisions to push profits into negative territory and begin eating into regulatory capital,” Shah and MacAdam observed.
Among the banks in India, Industrial Development Bank of India (IDBI) had a NPL ratio of 27.5%, UCO Bank 16.7%, Indian Overseas Bank 14.7% and Punjab National Bank 14.2% at end March 2020. With the pandemic crisis, NPL ratio can only increase further.
In contrast, the NPL ratio for Singapore banks averaged only 1.3% at the end of last year.