India’s banks are in bad shape

India’s banks are in bad shape

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According to a report in WSJ Wall Street Journal, in the past two weeks, at least 16 of India’s 21 big government lenders have either announced interim dividends or are at least considering these. This is an unusual announcement, because these banks typically pay a once-a-year dividend in summer time

By distributing dividends early, this means that they are contributing to the central government’s budget before the fiscal year terminates on March 31. The budget is already strained, by November, the government had exhausted 94 % of its deficit target. Also other government owned firms recently announced interim dividends. Obviously, this is because central elections in India are ante portas.

Banks cannot afford dividends, because they are in the worst financial condition in nearly a decade. Government lenders’ stressed loans, which include traditional nonperforming ones as well as “restructured” loans where banks ease terms for borrowers, made up 12.3 % of their loan books as of September 30. This represents more than twice the level from five years ago, thus capital buffers to absorb losses have sunk to their lowest level since 2009.

Probably the strongest of the bank lenders, Bank of Baroda, will feel the effect when they have to consider a dividend. If the bank had to write off all the stressed loans, it hasn’t set aside reserves for. Baroda would deplete 96 % of its common equity as of September 30.

The government’s infusion of USD 89 million of new equity slightly improved the situation, but this month’s interim dividend p0romptly deprives Baroda of USD 75 million. For its annual dividend this summer, if it has to fork out last year’s full amount, this means another USD 147 million.

In India, state owned lenders account for 75 % of the banking system, so India’s business cycle will not turn around until they become healthy. Stopping all dividends would be a good start, but this the government does not make it happen and much less prop0erly recapitalises banks. A worrisome message to investors! With other words, India’s economy is further at stake and observers believe this will not change until a new government is elected.

www.wsj.com


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