Indian banking sends new shudder through markets

Bloomberg

Indian regulators’ ability to come to grips with the nation’s banking crisis has been thrown into doubt amid reports that a cooperative lender had extended outsize loans to an insolvent developer.
The Reserve Bank of India took the rare step of limiting withdrawals from Mumbai-based Punjab & Maharashtra Co-operative (PMC) Bank Ltd. Local media reported that loans to Housing Development & Infrastructure Ltd (HDIL), a developer currently in bankruptcy court, accounted for almost three-quarters of unlisted PMC’s outstanding lending.
That figure was much higher than one provided by a former top executive at PMC and sowed confusion about the
cooperative banking sector, where some 97,000 lenders oversee a combined $130 billion of deposits according to CLSA Ltd — nearly a tenth of the wider industry’s total.
Among that plethora of lenders, only the 54 biggest are monitored by the central bank and investors are now trying to figure out whether they pose a new threat to a banking system hobbled by a 9.3 percent bad-loan ratio, the highest in the world.
“Such instances only reiterate that there is a need for tighter supervision for urban cooperative banks,” said SaswataGuha, director of financial institutions at Fitch Ratings in Mumbai. “I really hope this is an isolated case.”
Shares of HDIL, as the debt-ridden developer that benefited from PMC’s largess is called, tumbled to a record low at the close of trading. The companies couldn’t immediately be reached. The RBI had no comment. Indian banks are required to limit exposure to single borrowers to less than a fifth of the total.
The drumbeat of bad news in India’s banking market shows few signs of letting up.
Indiabulls Housing’s woes also appeared to drag down Yes Bank, which is trying to raise new capital after bad loans eroded its buffers. Yes Bank issued a statement saying its exposure to a “housing finance/real estate conglomerate” — which it didn’t name — “is totally secured.” The bank’s stock closed 15 percent lower.
Junior Finance Minister Anurag Thakur called the PMC incident an “eye opener” and that some media reports about the lender “are very shocking.” He didn’t name HDIL.
K Joy Thomas, the former managing director of PMC, told the RBI that HDIL accounted for 73 percent of the bank’s total loan book, Press Trust of India reported, citing an unidentified source.
The RBI monitors only the cooperative banks, including PMC, that are considered systemically important. Of those, about half faced credit and liquidity risks in stress tests conducted by the RBI, according to its latest financial stability report.