India’s bank rescue to spur GDP growth

Bloomberg

Goldman Sachs Group Inc. just got more bullish — and hawkish — on India. While the investment bank has for months been an outlier predicting monetary tightening in Asia’s No. 3 economy, it now sees the rate increases coming earlier than investors expect. That’s because the government’s plan to inject a record 2.1 trillion rupees ($32 billion) of fresh capital into its struggling lenders over the next two years will spur loans and growth in gross domestic product, boosting stocks and the rupee.
“A 1.05 trillion rupees infusion into state-run banks over the next 12 months would lower the drag on bank credit growth by up to 10 percentage points and boost GDP growth by up to 5 percentage points,” Goldman economists led by Jonathan Sequeira wrote in a note. “The measures are likely bearish for short-term rates, as they make the RBI more likely to hike rates sooner than market expectations.”
Goldman forecasts that the Reserve Bank of India will raise
its key rate three times by the end of 2018, “an outcome that
is not fully priced in by the
market,” where swaps indicate little change. The RBI is due to review policy on Dec 5-6, and a split within its rate-setting panel is already widening as members disagree sharply over the trajectory for inflation.

MONEY MULTIPLIER
Macquarie Group estimates that state-run lenders account for more than 70 percent of India’s banking system and they hold
almost 90 percent of all bad loans in the country, according to data from Credit Suisse Group AG.
Even after providing for the stressed assets, banks will have around 1 trillion rupees available for lending, said Soumya Kanti Ghosh, chief economic adviser with State Bank of India, the country’s largest lender. That could unleash at least 3.3 trillion rupees which could rise to a 10 trillion rupee additional infusion in the economy, he said.
The recapitalisation plan “addresses an important supply-side issue and improves the outlook for private capex recovery,”
said Upasana Chachra, India economist at Macquarie.
She retained her 7.2 percent growth estimate for the year through March 2019 but said that may rise if investments—some 30 percent of GDP—improve quicker than expected.
Goldman expects the RBI to start tightening in the second half of 2018 as inflation will move into the upper part of the central bank’s 2 percent to 6 percent
target range, Andrew Tilton, Goldman’s chief Asia-Pacific economist, said in an email. Goldman sees the rupee strengthening to 64.5 a dollar by the end of March. The currency was trading at 64.7950 as of 11:45 am in
Mumbai on Tuesday.
The risk is that if rates aren’t cut substantially, high real rates will dampen demand for loans and the infusion will go only towards capital requirements without leaving additional growth capital with banks, according to Bloomberg economist Abhishek Gupta. Then there are others who say that demand isn’t a problem; it’s just that banks are unwilling to lend to certain companies such as small and medium-sized businesses.
These businesses employ more than 90 percent of India’s workforce. However, just 4 percent have access to bank loans while the rest depend on informal money lenders or family funding, said Praveen Khandelwal, a top official at the Confederation of All India Traders, an umbrella organization representing India’s 60 million small and medium-sized traders. CAIT says sales over the recent festival season slumped 40 percent from a year earlier, leading to the worst Diwali in a decade.
“Given the slowdown, and
the problems traders face with
getting loans from banks, this
announcement was needed,” Khandelwal said, referring to
the bank recap plan. “But more needs to be done.”

Indian billionaire fund says bank boost to help clear loans

Bloomberg

The head of a credit fund under Indian billionaire Uday Kotak’s financial group says the government’s pledge of capital for
beleaguered state banks could make it easier for distressed funds to buy loans.
The Indian government said last week that it will inject 2.11 trillion rupees ($32 billion) of capital into state-controlled lenders over two years, as it seeks to revive growth in Asia’s third-largest economy. Distressed debt funds finding it easier to buy loans could help banks plagued by the highest stressed-asset ratio in nearly two decades to start lending more again.
“This recap could accelerate resolution of loans and perhaps the clearing price in the market may now be acceptable,” said S. Sriniwasan, managing director of Kotak Investment Advisors, which is part of Kotak Mahindra Bank, whose principal founder is Kotak.
India has attracted distressed debt funds to its bad loan clean-up, but they face challenges deploying money as lenders are often not willing to sell off their loans at a deep enough discount. The government’s capital injection should enable banks to take the necessary ‘haircuts’ on their nonperforming assets, according to S&P Global Ratings.
The Kotak Mahindra Group had signed an agreement with Canada Pension Plan Investment Board for investment in stressed assets in India in March 2016, with the latter able to invest as much as $450 million. However, Kotak’s stressed-asset fund deal with Canada Pension Plan Investment Board was called off as opportunities with appropriate returns were not available, according to the bank’s chief financial officer Jaimin Bhatt last week.
For Kotak, despite the opportunities in India’s debt clean-up, closing deals has proved to be elusive. “We have looked at situations but they have not closed largely because the clearing price was not to the expectation of the sellers,” Sriniwasan said. “The bid ask spread for bad loans has not closed completely.”
The Indian government’s capital injection also gives banks the “fire power” to start lending, which can kick-start growth in the economy, said Sriniwasan, who manages $2.8 billion of
assets in funds including special situations credit and private
equity funds.