India’s once troubled banks are making huge profits

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Ppeople watching Mumbai is not often turned to for tips on how to run a bank, and for good reason. India’s Supreme Court on May 2 ruled that the fraud-investigation office can prosecute auditors for their role in the 2018 collapse of an infrastructure-finance firm backed by state banks. Last year, four owners of state-run lender Indian Bank were sent to jail on charges of fraud. The cases against those in three other banks are ongoing in the courts of the country.

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Yet the recent annual earnings of Indian banks have been impressive. State lenders lead: Canara Bank’s net income up 87% over previous year, Union Bank of India’s 61% and IDBIis 49%. Private banks are hardly behind: ICICI37% in the earnings of Kotak Mahindra, 28% and HDFCis 19%. JPMorgan Chase, the global banking benchmark for excellence, offers a return on equity of 14%. India’s state-owned banks generate more than 11% on average, and private banks around 15%. In some developments, Indian banks are among the world’s most profitable, if any predicted.

During the first half of 2010, Indian banks reported numbers that were strong – but unrelenting. The practice of rolling over bad loans to avoid recognizing losses was prevalent, especially with those extended by state banks to borrowers with political connections. Reality would eventually intrude; An impasse came as scandals over the allocation of government licenses to industries including coal ended with the Supreme Court canceling hundreds of mining permits in 2014 and telecoms in 2017 with a surprise waiver of defendants. Approvals for projects froze, reducing their financial viability.

External expertise helped in the process. In 2015, Raghuram Rajan, a professor at the University of Chicago who was then the head of India’s central bank, initiated an “asset-quality review”. Declines and failures followed, notably in energy, steel and telecom. Political and business leaders faulted Mr. Rajan for pursuing reforms that they saw as a gaping hole in the economy. His tenure did not extend to a second term.

However, over time, critics have also reconsidered Mr. Rajan’s tenure at the Reserve Bank of India. It took more than five years for the benefits of his review to emerge, but they did so at an opportune time: just as COVID-19 hit. Instead of collapsing under the lockdown, India’s banks acted on early signs of improvement. Non-performing loans reached 16% of corporate loans in 2018. Since then they have declined rapidly. By early 2024, predicts rating agency Crisil, they should fall below 2%.

Narendra Modi’s government also deserves credit. Bankruptcy reforms in 2016 have accelerated the liquidation of failed firms, and prompted delinquent businesses to pay. In 2019, as part of the seemingly endless mop-up of Indira Gandhi’s banking nationalization half a century ago, the government announced that 27 state-owned banks would be reduced to 12, with many branches closing. The state’s banks have also written off $91bn in bad loans over the past five years – just slightly less than their combined value, according to the Boston Consulting Group. Many survived because of an infusion of 2.6 trillion rupees ($31bn) from the state, in exchange for shares, over the past three years. Such breaches have reduced recently, as banks have learned how to stand on their feet.

The process has accelerated and India’s economic growth has benefited. International Monetary Fund The country is expected to be the fastest growing major economy this year. As the system has become healthy, banks have lent more. Annual loan growth slowed to 3% in 2017. It is now up to 18%. Interest rates have risen less rapidly than in the US, which has helped ease tensions.

However, investors are not entirely convinced by the cleanliness of PSBs. HDFCKotak Mahindra and ICICI, three private sector banks, trade at thrice their book value. Many state-owned institutions still trade at a fraction of theirs, which means they are more dead than alive. One reason for this lack of trust is that India has taken similar steps before, notably in 1993, when other bankruptcy reforms were passed, and in 2002, when a law allowed banks to go after the impasse. was made easy. Both examples, ultimately, proved to be blips in the long-term decline.

The state still holds heavy influence over the country’s state banks. Senior appointments should go through the government. Bosses often serve two to three years, undermining long-term planning. Fear had its uses: when banks were in trouble, ministers were forced to aim for solvency rather than use them for political purposes. But as it slows down, will there be a period of relaxation? Only continued success for state banks will show that Indian finance has truly changed.

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