IMF warns of worsening India Inc financials if protectionism rises in world

Raises red flag over PSU bank NPAs, 70% of which are of the corporate sector

The International Monetary Fund (IMF) on Wednesday cautioned that corporates balance sheets would be hit hardest in India, apart from China and South Africa, in case protectionism rose in the world. It also warned against bad debt situation of banks in India.

"In a scenario of rising protectionism,... the greatest deterioration in corporate balance sheets would occur in China, India and South Africa," IMF said in its Global Financial Stability Report released on Wednesday.

It, however, added that emerging market economies (EMEs) have become more resilient, benefiting from a recovery in global commodity prices and still-supportive external conditions.

Even then, these economies face challenges along several channels in case protectionism rises. The corporate and banking sectors could face broad-based risks, it added.

Turning to the banking sector, it said although the profitability of banks in emerging market economies is generally strong, particularly compared with that in the United States and Europe, heavy credit losses continue to erode profits of many lenders, notably in Russia and India. It said non-performing and problem loans have climbed in India due to sector-specific downturns.

It said further deterioration in asset quality would erode capital levels for several banks in EMEs and advised that restoring provisioning coverage among the weakest banks is important to ensure the banking system has resilience to withstand further asset quality deterioration.

It gave an illustrative exercise to assess the potential extent of under-provisioning of weaker banks-- suppose that banks' provision coverage ratios are raised to at least 50 per cent of non-performing and problem loans, or to their country's average provision-to-loan ratio. This exercise generates some $120 billion (5 per cent of capital) in additional provisions, which would have to be fulfilled through retained earnings, existing capital, or new equity.

More profitable banking systems such as those in Colombia and Indonesia would be well positioned to absorb such costs. However, for about 30 per cent of emerging market bank assets (outside of China), additional provisions would exceed average annual net income. In more than a third of the banking systems in India and Russia, provisioning needs would amount to at least three years of net income, unless profits recover from cyclical lows.

To account for cyclical weaknesses in some countries, which may reduce net income, provision needs can be compared with pre-provision profits. Based on this approach, some banks in India and Russia would still require more than one year of earnings to boost provisioning, it said.

Public sector banks in India had Rs 6.8 lakh crore NPAs as on December 31, 2016 of which 70 per cent are of big corporate houses. "It is not that hundreds and thousands of businesses have created this problem. The problem of big NPAs is confined to essentially 30-50 companies. Those need to be resolved," Finance Minister Arun Jaitley had said.

Bad loans of PSBs rose by about Rs 1 lakh crore during April-December, the bulk from the power, steel, roads and textile industries.