Banking industry's 9/11 PDF Print E-mail
Saturday, 12 November 2011 07:34
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Banking industry's 9/11

Two airlines, Air India and Kingfisher, have ripped into it



Anyone who exulted over S&P’s ‘upgrade’ of the Indian banking system—at least three major financial dailies had the same headline “S&P differs with Moody’s, upgrades banking sector”!—would do well to see how the Kingfisher crisis is unfolding. Aviation minister Vayalar Ravi has said he’d speak to finance minister Pranab Mukherjee about it but, given that he’s already asked states to try and lower taxes on aviation fuel, it suggests he will ask Mukherjee to ask banks to be generous in restructuring. How much more generous banks can be is not clear given how, in April, they converted R750 crore of debt into equity at a price that was significantly higher than Kingfisher’s share price! Banks own 24% of Kingfisher’s equity but have little or no say in its running. They have one of Kingfisher’s 9 directors, but surely the banks could have asked for a greater equity share, at least 26%—a little more and they could have had more shares than Mallya and driven tough changes in the way the airline has been run. More than Mallya, banks have to answer questions on what they’ve done to see that their money was better utilised.

Much the same, actually more, can be expected for Air India, which is also looking for restructuring and a lot more loans though with, as this newspaper has pointed out often, no serious chance of turning around. RBI’s view has been asked for, but banks are supposed to evaluate turnaround plans, not RBI. The standard banker’s response is that if the loan is not restructured, it will become an NPL immediately. Better an NPL in the future than now is the overwhelming philosophy! Given that R56,000 crore more of loans to power companies will likely need restructuring in the next 18 months, according to Crisil, banks will have a lot more chances to push forward today’s NPL into tomorrow’s NPLs.

The S&P upgrade, the rating agency makes clear, was more to do with a changed methodology due to the fact that western banks are under pressure while developing country ones are doing better—the new framework gives a higher weight to economic imbalances, the resilience of the economy and the government’s role in funding banks. So India had to do better even if its banks have greater NPL pressures, though the new score of 5 still reflects, to quote S&P, “our opinion that India has ‘high risk’ in ‘economic resilience’ … and high risk in ‘credit risk’ in the economy”. Even RBI’s stress test had indicated that asset quality, profitability and efficiency of banks had fallen significantly in the last one year. The only difference between RBI and Moody’s was about the government’s ability/desire to fund the capital needs of PSU banks.

9/11 was about two aircraft flying into US buildings. This time around, it is about two whole airlines, among others, flying into the banking system’s edifice.


Last Updated ( Tuesday, 15 November 2011 03:21 )

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