lipstick on a pig

http://www.bloomberg.com/news/articles/2016-03-14/day-of-reckoning-coming-for-india-s-pigs-with-lipstick-lenders

“You can put lipstick on a pig, but it doesn’t become a princess,” Rajan had told bankers soon after he took over as chief regulator in 2013. “So dressing up a loan and showing it as restructured, and not provisioning for it when it stops paying, is an issue. Anything which postpones a problem rather than recognizing it is to be avoided.”

The day of reckoning is coming: The Reserve Bank of India is due to complete its audit of all 50 of the country’s banks by the end of this month, forcing them to lay bare their hidden non-performing loans, stop making new loans to deadbeat borrowers just to pay the interest on their already-bad ones, and set aside more cash to cover their write-offs.

That means India’s already-ugly bad loan situation is set to get even worse. The banks so far have been willing to disclose that $131 billion, or about 14 percent of their total lending, has gone bad since the RBI stepped up pressure on them last year. Another $36 billion may yet be added to that total, bringing total non-performing loans to 18 percent, when the audit finishes on March 31, according to Credit Suisse Group AG.

“Full recognition of stressed loans is yet to happen,” analysts including Ashish Gupta wrote last month, noting that while only 10 percent to 20 percent of loans to the struggling steel industry have been classified as impaired, the borrowers are unlikely to become profitable even if steel prices recover significantly. “Almost 86 percent of steel sector debt is with companies under a high degree of stress.”

The scale of the problems started becoming apparent almost a year ago, when a usual quarterly audit of Bank of India forced the Mumbai-based lender to increase provisions on loans to Essar Steel India Ltd. A number of Indian lenders subsequently were forced to acknowledge that loans to the steel manufacturer totaling $6.5 billion may be tough to recover, 

The central bank also eased rules allowing lenders to consider reserves associated with property revaluations and foreign-currency translations as common-equity Tier 1 capital, which according to CLSA Ltd.’s estimates could free up as much as $8 billion in capital for state-run banks. Analysts continue to express concerns regarding banks’ ability to recover bad loans due to India’s lack of a legal system that offers quick resolution of disputes regarding recovery of assets.

Gross bad debt in India’s banking system stood at 5.1 percent as of Sept. 30, more than three times the bad-debt ratio at Chinese banks, data compiled by the RBI show. The 14 percent bad loan figure includes restructured and written-off loans.

“India’s banks have a higher bad-debt ratio and its regulatory system is less prepared for a financial crisis than that of China,” Bloomberg Intelligence analyst Alex Gardner said in a note. “Bad debts and weak laws may lead to the higher chance of a banking crisis.”