SBI results confirm India Inc's bleeding; GDP will hit new low in 2013-14
If the banking sector is a proxy for the Indian economy, the smoke signals coming from the first quarter (Q1) results of banks is telling.
Most banks - especially public sector banks - have reported a sharp reduction in profits and a corresponding rise in bad loans (non-performing assets, or NPAs), making it clear that the economic situation is going from bad to worse.
The country is, therefore, unlikely to report more than 5 percent GDP growth in 2013-14. In fact, it could well hit another decade's low and fall below 5 percent. If GDP has to grow at 5 percent, banks have to grow at more than 12-15 percent in money terms, and that is unlikely to be the case, thanks to the weight of growing bad loans.
Today's results of the State Bank of India - which accounts for more than a fifth of the Indian banking sector - confirm that corporate India is bleeding, and banks are beginning to hurt, in turn. SBI's profits are down 14 percent, thanks to higher provisioning.
If they are still reporting reasonable profits, it's because they have some leeway in figuring out what is a bad account, and what is just a grey one, which can be restructured and shown as good. In short, they can make their books seem prettier than they are.
But the key numbers on bad loans can't be hidden at all. State Bank of India's gross NPAs went up in Q1 (April-June) from 4.75 percent of assets last year to 5.56 percent this year. The figures for the other big four nationalised banks are similar: Punjab National Bank's gross NPAs went up from 3.34 percent to 4.84 percent; Bank of India's from 2.56 percent to 3.04 percent; Bank of Baroda's from 1.84 percent to 2.99 percent; and Canara Bank's from 1.98 percent to 2.91 percent.
The decline in the quality of bank loans is directly the result of poorer corporate performance. A report in Business Standard today says that some 143 of the 406 (non-financial) firms in the BSE 500 that declared results so far have debts greater than their market value.
Using data from Capitaline, the newspaper reports: "At the end of March this year, these companies were sitting on a debt of Rs 13.2 lakh crore - nearly twice their average market capitalisation in July. Two years ago, however, it was the other way around. In July 2011, their market value was 40 percent higher than their net debt."
In short, debt is what is destroying value for India Inc. And a deteriorating ability to service this debt is causing banks to tank as well. Not surprisingly, both the S&P BSE Bankex and the National Stock Exchange's Bank Nifty have fallen 27 percent from their 52-week highs, destroying value all around. The Nifty and the Sensex are being propelled downward primarily by the banking sector's poor performance. And remember, banks are a proxy for the economy.
The key takeouts from this state of affairs are these:
#1: When banks are doing progressively badly, there is little chance that they can cut interest rates, since they have to make up for bad loans and writeoffs by charging more from other borrowers.
#2: With the government trying to squeeze domestic liquidity in order to improve the dollar-rupee equation to the Rs 59-60 range, banks will have lesser resources to lend. Hence rates will remain up for the foreseeable future.
#3: Banks with rising NPAs also need more capital. Since the bulk of the banking sector is government-owned, this means government has to provide more capital for growth. Or else banks will have to constrain lending. Moreover, providing more capital means government's own debts, and fiscal deficits, will rise. On the contrary, the pressure from the rating agencies is for government spending to be reduced.
#4: The finance minister has said that he will not allow the fiscal deficit to slip below the level promised in the budget (4.8 percent of GDP); but this means he will have to cut expenditures, as he did last year. Cutting capital expenditure will accentuate the industrial slowdown, because government is the biggest buyer in the economy, making both bad loans and corporate profits worse. In May, the finance minister had said: "I don't wish to compress expenditure, therefore revenues have to go up... For 2013-14, (we) have to do much better than 4.8 percent," Mint reported in May. Will he have to eat his words, since revenues are not growing and expenditures will have to be compressed to meet deficit targets?
#5: In the first quarter, the fiscal deficit is already half the figure pencilled in for the whole year (48 percent of the full-year's figure). This means P Chidambaram has only half the money available for meeting expenses in the remaining three-quarters of fiscal 2013-14. He will have to apply the brakes even harder in the second half, unless revenues perk up - which is not certain when companies are bleeding and banks are pulling back on loans.
#6: Chidambaram has also promised to tackle the current account deficit (CAD) and bring it lower this year to make it more manageable. "This year also I will finance current account deficit fully and safely," he told Business Standard last week. This is certainly possible, with the weakness in the rupee bringing down imports (down 6.2 percent in July) and higher incentives for exports (up 11.6 percent). But when imports are compressed, will growth not come down as well?
When exports receive more subsidies, won't the budget deficit rise? When imports fall, won't customs revenues also fall? In Q1, customs duty collections grew 4.9 percent (well below the year's 13.6 percent target), but even this was the result of the rupee's depreciation, which pushed up the value of imports in rupee terms.
This is where the argument is leading: if profits are falling, banks are seeing their loan books worsening, if government revenues are well below estimates and expenditures are worse than expected, if imports are falling and interest rates will remain fairly high, where is growth going to come from?
The only bright spot is agriculture, thanks to bountiful rains so far. But too much rain is not necessarily good for crops. So the expectations of a bumper kharif harvest will have to be muted till we know how much damage excess rainfall has caused.
The chances are 2013-14 will not see growth exceeding 5 percent.