Banks May Become Victim Of Falling Rupee

India: Plummeting rupee fuels fears of banking crisis

By Keith Jones 
24 August 2013

After sinking to an all-time low of 65.56 rupees to the US dollar in trading Thursday, India’s currency staged a modest recovery, closing Friday at 63.20 rupees per dollar.

While India’s corporate media breathed a huge sigh of relief, many financial analysts said a major factor in the rise was a large selloff of dollars by state-owned commercial banks, a move they attributed to instructions from India’s central bank, the Reserve Bank of India (RBI).

On Thursday, Finance Minister P. Chidambaram, the RBI’s outgoing governor, D. Subbarao, and the man who will replace him next month—former IMF chief economist and US Federal Reserve Board advisor, Raghuram Rajan—held a hastily organized three hour meeting to discuss the rupee crisis.

Following the meeting, Chidambaram and Subbarao held back-to-back press conferences at which they argued that the rupee’s decline has been fueled by “excessive or unwarranted pessimism.” “There is no cause,” declared Chidambaram, “for the panic that seems to have gripped the currency market and that is feeding other markets.”

Both the finance minister and RBI governor pledged that India will not introduce further capital controls, “including controls on repatriations” of the earnings of foreign investors. These statements were an implicit admission that the limits imposed last week on Indians transferring assets overseas backfired, as they caused foreign investors, fearful that they might be next, to withdraw funds from India.

Since May, the rupee has depreciated by more than 15 percent, despite increasingly desperate efforts by the Congress Party-led United Progressive Alliance government and the RBI, to arrest the slide. The government has removed or scaled back limits on foreign investment in a dozen sectors, pledged to accelerate the introduction of other pro-investor “reforms,” and announced budget “deficit consolidation” measures, including the doubling of natural gas prices next April. The RBI resisted pressure from manufacturers to lower interest rates to stimulate a badly flagging economy, then in recent weeks tightened credit. On August 14, Indian authorities imposed limits on the amount of money that domestically-owned companies and Indian residents can send out of the country, as well as measures to restrict gold imports.

While the rupee’s plummet has been triggered by the expectation that the US Federal Reserve Board will soon curtail its “cheap credit” policies, the more fundamental cause is the sharp decline in India’s growth rate and the interrelated fall in long-term foreign investment. With exports hard hit by the recession in Europe and anemic growth in the US, India’s economic growth rate fell to just 5 percent in the 2012-13 fiscal year, the lowest in a decade. Foreign investors have soured on India, with a crescendo of complaints about poor infrastructure and the government’s reputed lack of resolve in imposing unpopular “pro-market policies,” including gutting restrictions on the layoff of workers.

The government has tried to project a public image of calm in the face of the rupee’s plummet. But behind the scenes fear, if not outright panic, prevails. The Indian press has been full of warnings that India could soon face a current accounts crisis, due to a mammoth trade deficit and a huge increase in short-term corporate and government debt.

In its March budget, as part of its efforts to convince bond-rating agencies not to slash India’s credit-rating to junk bond status, the government pledged to significantly reduce the Current Accounts Deficit (CAD) from the record high of 4.8 percent of GDP recorded in 2012-13. At the end of July, Chidambaram baldly vowed that the CAD will be held to 3.7 percent of GDP in the current fiscal year.

The continuing fall in the value of the rupee is not only making Chidambaram’s vow appear less and less credible, it is threatening India’s economic prospects as a whole. The depreciation of the rupee is driving up the cost of India’s imports—most importantly of oil (India imports more than three-quarters of the oil it consumes) and of the advanced machinery it needs to equip its export-oriented manufacturing sector—and thereby increasing the country’s trade and current accounts deficits while fueling inflation and dampening economic growth.

After it was reported last week that Finance Minister Chidambaram had met with the Indian executive directors of the World Bank, International Monetary Fund, and Asian Development Bank, the press suggested this might be preparatory to seeking IMF support. In an interview with Le Monde, former RBI deputy governor Subir Gokarn said an IMF loan was “an option” for Indian policy makers in their current predicament.

The threat of a current accounts crisis is real and mounting, but it is far from the only threat looming over the Indian economy. India’s banking system is burdened by a growing number of “non-performing loans.” Moreover, many of these loans are to corporations that have borrowed money in the US and European markets, where interest rates have been much lower than in India. With the plummet in the value of the rupee, these dollar-denominated loans have suddenly become a major liability, threatening to wreak havoc with corporate balance sheets and those of India’s banks.

A recent report by Credit Suisse found that ten major Indian business houses, including such stars of India Inc. as Reliance Industries and Vedanta, have total debts of around $100 billion, a 15 percent increase from last year. “Many companies’ loans are 40-70 percent foreign-currency dominated,” observed the report, “therefore, the sharp depreciation of the rupee is adding to their debt burden.”

India’s banks have extended these same ten companies loans equal to 13 percent of all the loans on their books—meaning they threaten to be caught in the same vise.

With these and other major Indian companies struggling due to the world economic crisis, India’s state banks, with the RBI’s blessing, have systematically “restructured” corporate loans by extending the period of the loan, reducing the interest rate, or by even taking a “haircut.”

Whereas the banks must put aside funds equivalent to 15 percent of “non-performing” loans, they are required to have reserves equivalent to just 2.75 percent of “restructured” loans. According to one banking analyst this amounts to a “giant Ponzi scheme” through which India’s banks have hidden huge potential losses.

Even so, the State Bank of India, India’s largest bank, reported that its non-performing loans for the April to June quarter increased to 5.6 percent of total loans, a steep increase from 4.8 percent at the end of the previous quarter. This statistic is symptomatic of the whole banking sector, whose “asset-quality” has progressively decreased as the economic growth rate has taken a nosedive.

Whatever the fate of the rupee in the days immediately ahead, it is evident that India is in the maelstrom of the world capitalist crisis. The coming period will see a rapid intensification of the class struggle as the Indian elite and international capital seek to force the working class and rural poor to pay for the bankruptcy and irrationality of the profit system.

http://www.cpifinancial.net/news/post/22668/whats-driving-down-the-indian-rupee

Gross non-performing assets of nationalised banks soar-Times of India -24.08.2013

Gross non-performing assets (NPAs) have increased sharply in public sector banks (PSBs) in the first quarter of the current financial year as a rapidly slowing economy is resulting in a quantum leap in bad loans. Gross NPAs as a percentage of advances stood at a two-and-half year high in several leading PSBs in the April-June quarter. 

State Bank of India (SBI), the country's largest lender, topped the list of banks with the highest gross NPAs (in percentage terms) during the quarter among BSE-Bankex constituents. The gross NPA to advances for SBI, which has seen a steady increase in bad loans, surged to 5.56% in April-June, the highest since the quarter ending March 2011. Gross NPAs have increased 81 basis points (0.81%) for SBI during the quarter, data with the Centre for Monitoring Indian Economy(CMIE) showed. "The rise of bad loans is across the board. The growth has lowered,manufacturing sector is not doing that well and interest rates are going up instead of moving down. In such an environment, NPAs will only move up," Vaibhav Agrawal, vice president,Angel Broking said. 

Gross NPA to advances surged to the highest in 10 quarters for Bank of Baroda, Canara Bankand Punjab National Bank. Incidentally, global ratings agency Moody's downgraded the bank finance strength ratings of Bank of Baroda, Canara Bank and Union Bank of India on August 16. Moody's says PSBs would find it difficult to respond to slower economic growth, deteriorating asset quality and declining profit margins. 

Bank of Baroda whose gross NPA stood at 2.99% at the end of the first quarter of FY14 said in an analyst call that the bank has "significantly strengthened its credit monitoring process for early detection of stress accounts ." In terms of sequential movement (from fourth quarter of FY13 to first quarter of FY14) of gross NPAs for Bank of Baroda, the share of agriculture was highest at 5.29% during the period ended June 30 as against 4.9% during the fourth quarter of FY 13. Large and medium enterprises stood second with a gross NPA ratio of 5.06% on June 30 as against 3.29% during March end. 

Interestingly, private sector banks have not seen much deterioration in asset quality and have managed to maintain their NPAs at low levels. HDFC Bank, Axis Bank and IndusInd Bank are maintaining their gross NPAs to advances at 1% levels for the past several quarters. ICICI Bank's gross NPAs had increased to a high of 4.47% in the quarter ending March 2011. But the bank has steadily brought it down to 3.23% in April-June, CMIE data showed. "That is because these institutions have better credit standards when compared to their nationalized counterparts," Agrawal said. 

Even south-based banks have not been spared from the NPA blues. In the case of Indian Bank, gross NPA levels showed a rise and stood at Rs 3,723 crore as on the first quarter of FY14 while it stood at Rs 1,554 crore as on June of last year. Net NPAs also rose during the same period to Rs 2,486 crore as compared to Rs 963 crore during the same period in 2012. During the period, the bank restructured accounts in the discom sector to the tune of Rs 35.01 crore. 

"We have contained our net NPA ratio at 2.3%. We have recovery strategy and action plan for the year wherein we are meeting up with the top 50 NPA borrowers every weekend to see which accounts can be upgraded and initiating recovery proceedings for others," T M Bhasin, chairman and managing director, Indian Bank said. 

Similarly, Indian Overseas Bank also saw its bad debts rise during the first quarter of FY14. Gross NPA rose to Rs 7,431.69 in the June 2013 quarter as against Rs 4,409.70 in the corresponding quarter last year.

http://timesofindia.indiatimes.com/business/india-business/Gross-non-performing-assets-of-nationalised-banks-soar/articleshow/22015086.cms

What’s driving down the Indian rupee?

Avinash Vazirani, manager of the Jupiter India Fund says Indian politics, a rudderless central bank and US tapering fears are all playing their part in driving down the Indian rupee. India’s long-term economic growth prospects however should, in his view, continue to reward the patient investor.

“Tracking the latest slump in the Indian rupee against the world’s major currencies, we have been struck by how reluctant the Reserve Bank of India (RBI) has been to intervene directly in the markets to support the currency. There was a time when the RBI was much less shy about coming forward. At the height of the financial crisis, in 2008, the central bank had no qualms selling billions of dollars a day to support the rupee and send a message to the markets that there was a level below which it would not accept further depreciation. So what’s changed?

“The RBI, in our view, is the victim of unfortunate timing. The outgoing governor of the central bank is in the process of handing over the reins to his successor, Raghuram Rajan. Rajan does not officially take up his post until 5 September, leaving something of a power vacuum at the top of the RBI. In such an “interregnum”, it is quite easy to imagine policy paralysis, with a soon-to-be ex-governor unwilling to sanction, for instance, a major intervention in the foreign exchange markets, and a new governor not yet in a position to be able to do so. Once Rajan is in place, we believe the RBI will act more decisively to stabilise the rupee. Concern, meanwhile that the RBI may not have the financial muscle to intervene appears in our view to be unfounded given the latest data showing a rise in the central bank’s forex reserves.

“The minutes of the latest RBI advisory committee meeting meanwhile provide another clue, in our view, as to why the RBI has been less active in the foreign exchange markets than in the past. The minutes show some members of the committee were keen to let the rupee continue its downward slide as it would improve the competitiveness of India’s exporters.

“While the speed of the rupee’s decline may be causing some investors concern, we believe it is important to view this downward swing in the context of summer trading volumes where smaller, single bets by traders on a currency can have a disproportionate impact in the absence of bigger, key players.  

“On a more positive note, RBI’s measures to boost the country’s beleaguered banking sector and lower the cost of borrowing do appear to have had some effect. The central bank’s announcement this week that it would buy Rs80bn ($1.2bn) of long-dated government bonds did see the yield on the benchmark 10-year government bond fall back to 8.2 per cent from an intraday high of 9.47 per cent on Tuesday.

“The political climate in the country is also doing little to boost positive sentiment towards India. The current government is much too focused, in our view, on legislation that will help it to get re-elected, with the country due to go to the polls by the middle of next year at the latest. Some of the more difficult structural reforms that need to be undertaken have been put to one side. Apparent disagreement meanwhile between the government and the outgoing Governor of the RBI, Duwuri Subbarao, over macro-economic policy has done little to boost confidence that there is a clear economic and monetary strategy in place to take the country forward. It is our view that India would benefit hugely if early elections were called if only to end this period of uncertainty dominated by political electioneering.

“Domestic politics may be playing its part in the rupee’s slide but US monetary policy is also having a significant impact. The US Federal Reserve’s $85bn-a-month bond buying programme unleashed a wave of cheap money that found its way into emerging markets where it could earn higher yields than in developed markets.  Since the US Federal Reserve has signalled it would be cutting back on its bond buying once the US economic recovery is on sure footing, investors have been piling out emerging markets, sending these countries’ currencies spiralling down. In various degrees, Brazil’s real, Indonesia’s rupiah or Mexico’s peso, just like the Indian rupee have all fallen sharply against the US dollar. With the Federal Reserve still unwilling to set a date on when it will start the tapering of its quantitative easing programme, as its bond buying scheme is better known, the rupee and other emerging market currencies are likely to remain volatile.

“That said, economists do see the rupee strengthening against the US dollar by year end and it is a view we share. It is easy in the current currency maelstrom to forget some of the key strength of the Indian economy. First, it is an economy that it is still growing at a solid pace with the IMF forecasting GDP growth of 5.6 per cent in 2013 and 6.4 per cent in 2014. Even if the growth rate is marginally lower than this, much of this growth will be driven by the huge amount of demand for goods and services from India’s growing population of 1.2 billion. And whilst a falling rupee does raise the spectre of inflation, India’s exporters will be rejoicing. It will be up to the RBI to steer a delicate course between growth protection and currency stabilisation.

“We continue to remain overweight consumers as we believe that this is the most resilient sector in India with good growth, particularly in view of expected higher agricultural output and the resulting rural growth (70 per cent of the population still lives in rural India) and have increased exposure to exporters who will benefit from a competitive currency.”

http://www.cpifinancial.net/news/post/22668/whats-driving-down-the-indian-rupee