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Commentary: The Closer You Get, The Worse India's Banks Look (Int'l Edition)


International -- Finance: COMMENTARY

COMMENTARY: THE CLOSER YOU GET, THE WORSE INDIA'S BANKS LOOK (int'l edition)

By all appearances, India's big state-controlled development banks seem to have escaped Asia's financial crisis. Local rating institutions give high marks to these banks, which have funded big steel, chemical, and textile companies. Brokers such as Credit Lyonnais and Goldman, Sachs & Co.'s local affiliate, Kotak Securities, even recommend the stocks of these lenders, which account for 12% of India's bank assets.

But the loan portfolios of these banks warrant a closer look. As the new coalition government of the Bharatiya Janata Party prepares its first budget in May, investors will be watching closely to see whether the party will tackle the banks' bad loans. Failure to come up with a plan could lay the groundwork for a crisis of East Asian proportions.

It's not easy figuring out the true state of the portfolios at these lenders--Industrial Credit & Investment Corp. of India, Industrial Development Bank of India, and Industrial Finance Corp. of India. But a few analysts see trouble. "It's a bubble waiting to burst," says Arthur Andersen's Vijay Sahni.OVERHANG. Other highly placed industry sources, speaking on condition of anonymity, note that the banks spent decades lending to politically connected business groups, including Modi, Modern, and Thapar, that had licenses to dominate certain industries. They maintain that many credits went to projects of dubious value. When the government opened the economy in 1991, many borrowers faced competition that ruined profits. Some have defaulted, and industry experts say that as much as 25% to 40% of the banks' portfolios may consist of nonperforming assets.

Industrial Credit & Investment and Industrial Development Bank dispute these numbers. Executives at Industrial Finance declined to be interviewed. True, these institutions have been lending more prudently since 1991. Yet the overhang from the old days is so big that by some measures $3 billion in loans should be written off. The banks are anxious to avoid write-offs, and so keep extending fresh loans to struggling borrowers. Analysts estimate that Essar Group, for example, is some $400 million behind in its loan payments. Essar Group denies the reports. But the three banks keep lending to the company, which over the last decade has spent $1 billion on a steel and power plant complex.

Development bank execs concede some weaknesses. Industrial Development Bank--India's largest financial institution, with $14.9 billion in assets--has reported that 10.3% of its loan portfolio is nonperforming; Industrial Credit reckons its level at 7.6%; Industrial Finance, 12.2%. Analysts say they can account for the difference between their estimates and the banks'. For instance, they say some loans have been converted into debentures, which banks classify as investments. The banks deny any improper accounting. They say the most they do is adjust repayment schedules to help out some creditors.

P.S. Subramanyam, an Industrial Development Bank executive director, is cracking down on deadbeats. The bank won't lend to a company if a sister in the same group is in arrears. It refused to lend $10 million to Modi Rubber in 1996 after Modi Cement defaulted. At Industrial Credit bank, Managing Director K.V. Kamath is reducing his exposure to steel and textile mills and other state-backed projects. He also plans to adopt international accounting standards.

The banks' efforts have won plaudits from some observers. Anand Shanbhag, banking analyst for Kotak Securities in Bombay, thinks bad debt levels at the three banks will decline. And Crisil, a Bombay rating agency, is keeping a local-currency AAA rating on the banks. It figures the government won't let them founder. The banks also are tapping the markets: This year, Industrial Credit plans to raise $750 million at home and abroad. Yet whether such moves will suffice is anyone's guess. The banks should quickly write down bad loans, adopt Western accounting standards, and, maybe, merge with each other. Such restructuring will be politically unpopular. But the government must get serious about reducing nonperforming loans. It needs only to look at East Asia, where dysfunctional banks triggered a crisis, to see the cost of inaction.By Manjeet Kripalani


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