Banker Jail Time Fears Ease, Helping Solve Indian Bad-Loan Mess

(Bloomberg) -- Moves to sort out India's $207 billion of bad loans may have eased one threat hanging over executives of state-owned banks: the danger they could be thrown in jail if a future generation of politicians in New Delhi decides they have sold off assets on the cheap.

That's because the new bankruptcy courts set up by the government to handle troubled companies create a transparent process for pricing the assets and writing down their loans, according to P K Gupta, a managing director of State Bank of India, the country's largest lender.

“Now there is no fear or apprehension as bankers can take recovery decisions in comfort, knowing that they are backed by a proper law and processes,” Gupta said in a recent interview. “Taking any huge haircuts on non-performing loans without a proper price discovery mechanism has always been a big problem.”

Until the creation of the courts last year, the murky process surrounding bad-debt sales left the heads of state banks vulnerable to accusations of wasting government money, or worse. That fear was one of the factors holding back a solution to the stressed asset problem, which has weighed on the balance sheets of Indian lenders and hurt the economy by restraining credit growth.

Whatever the merits of some recent cases involving state bankers, they helped stoke the climate of fear in the industry. The former chairman of India's Syndicate Bank was among those arrested in 2014 for allegedly taking bribes in exchange for extending loans to a local company. Earlier this year, the former chairman of IDBI Bank Ltd. was arrested for alleged irregularities in approving loans to Kingfisher Airlines Ltd. -- the carrier founded by fugitive tycoon Vijay Mallya, who is fighting attempts to have him extradited from the U.K.

Over the next year, the assets and debts of about 50 of India's biggest defaulters may be sold off by court-appointed professionals, a process in which banks are expected to take deep haircuts on their loans. Those companies' borrowings total an estimated 3 trillion rupees ($46 billion), close to one-third of total recognized bad loans in India's banking system.

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In another move to resolve the problem, the government announced last month it will inject 2.1 trillion rupees into state-owned banks, to strengthen their capital and make it easier to recognize losses on their loans.

Gupta said he expects a “significant portion” of the recapitalization money will be received by SBI, enough to deal with the bad loans on its books and support new lending for the next two or three years.

“When credit demand picks up and the economy expands at a faster clip, we will be well placed to benefit from it with a well-fortified balance sheet,” said Gupta, whose career at SBI spans 35 years.

Dominant Lenders

SBI and the other 20 government-controlled banks have extended more than two-thirds of outstanding loans in India, and account for almost 90 percent of non-performing debt, according to Credit Suisse Group AG data. SBI alone accounts for about one-quarter of bank loans in India. Getting the state banks to accept deep discounts on those bad loans has been a key obstacle to resolving the wider problem.

SBI's loan growth will average about 12 percent over the next two years, driven by demand from consumers as well as from small and medium-sized enterprises, Gupta said. The bank has tightened underwriting standards, and now reviews the payment status on its loans to companies on a real-time basis, Gupta added.

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SBI's bad loans amounted to close to 10 percent of the total at the end of September, the highest proportion since at least 2005, exchange filings show. 

To contact the reporter on this story: Anto Antony in Mumbai at aantony1@bloomberg.net.

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Russell Ward

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