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Bond rally to help India tide over its bad loan ratio

Bloomberg Mumbai | Updated on August 02, 2019 Published on August 02, 2019

Each basis point fall in the yield adds Rs 350 crore ($50 million) to banks treasury gains, boosting their ability to write down bad loans, says ICRA

One of Asia’s best bond rallies is bolstering Indian banks efforts to accelerate clean-up of the world’s worst bad-loan pile.

The benchmark 10-year sovereign bond yield dropped about 50 basis points in July, extending the past year’s decline to more than 130 basis points. Each basis point fall in the yield adds Rs 350 crore ($50 million) to banks treasury gains, boosting their ability to write down bad loans, estimates by ICRA Ltd’s show.

The windfall treasury profits come as a relief for lenders staring at a potential surge in bad loan provisions due to a slowing economy and a cash squeeze in the nations shadow banking system.

India’s proposal last month to issue the country’s first overseas bond and bets on deep cuts in policy rates are adding fresh legs to the bond rally. This may not be the first time a bond bonanza helped India clean up bad debt in its financial system.

“Two decades back, when the soured-debt ratio at banks was hovering close to 15 per cent, yields on government securities fell sharply, generating mark-to-market gains that came handy in cleaning out the bad debt pile,” Romesh Sobti, Chief Executive Officer at IndusInd Bank, said in a recent interview.

“While this time around the drop in the sovereign bond yields is not as dramatic, the quantum of bond holding is way higher,” he said. “Gains will be handsome enough to enable banks to start cleaning up the books faster.”

Bond boon

Credit markets are already cognizant of this bond boon. The average cost of credit-default swaps insuring the bonds of five Indian lenders against non-payment for five-years has dropped 35 basis points last month, according to data provider CMAI. This has been the sharpest drop in about five years.

Adding further to the optimism is the government’s plan to infuse Rs 70,000 croreinto state-run banks in the year to March 31 to strengthen their balance sheets and kick-start the nations economic expansion. The pace of economic growth slowed for an eighth consecutive month year-on-year in June, according to Bloomberg Economics.

“Public-sector banks as a sector can emerge from the red behind lower provisions and potentially better trading-related gains,” said Ismael Pili, co-head for Asian bank research at CreditSights Singapore. “At the very least, we should expect earnings support from trading-related income in subsequent quarters.”

Published on August 02, 2019
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