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India’s Bad Loan Feast

Government sponsored IDBI Bank recently reported NPAs of 21%.  But that is not the most interesting aspect of IDBI Bank’s Earnings report.  The most interesting data was that more than 70% of the loans are consortium lending where IDBI Bank is just one of the lenders, the other lenders being other Public and Private sector lenders.  How is it then that other banks are not reporting similar sized NPAs?

It is not mysterious if one considers this fact in conjunction the reality that real economic growth in India at present is non-existent.  The credit growth reported by banks (mostly the private sector banks) has been for evergreening loans (basically new loan disbursements are used for interest servicing of existing loans).  There is negligible funding of new projects, which alone can cause growth.

In summary, Indian banks have become zombie banks like the Japanese banks of the 1990s when all resources (financial and managerial time) was spent in hiding bad loans.  This caused the lost decade of zero economic growth in Japan.  Unless the banking regulator forces Indian banks to recognize bad loans, the Indian economy is likely to witness very poor real growth (as opposed to statistical jugglery) over the medium term.


Indian Banks caught with their Pants down

We have been crying hoarse for some time that Indian private sector banks are hiding their NPAs.  A first whiff of that came last week when India’s banking regulator indicated that banks such as Yes Bank should report a much higher level of NPAs than they actually do through various artifices.  The Yes bank stock tanked.  For some weird reason the market seems to believe that it is a Yes Bank specific problem instead of recognizing it as an Indian Private Sector bank problem.

An interesting World Bank Study came out last week which stated that the recovery from NPAs in the Indian banking sector is 26%.  So the LGD is 74%.  Most Indian banks, even those that are not hiding their NPAs, have provisioned only 10% for their NPAs, clearly nowhere near expected losses.

In summary, India’s public sector banks have correctly estimated the PD (probability of default) of their loan books while grossly understating their LGD.  The private banks are understating their PD as well as LGD.

Are India’s New-Gen Banks the Snapdeal of Indian Banking?

Yesterday India’s e-retailer Snapdeal admitted that its business model was unviable.  Growth at breakneck speed, with scant regard for RoCE metrics, was clearly unviable.   India’s new-gen banks like Yes Bank, IndusInd and RBL have been growing at breakneck speeds.  We have been always skeptical about the ability of a financing institution to grow at crazy speeds (particularly during the early part of an organisation’s life when the credit assessment systems and processes are not fully in place and an organisation’s ability to instill credit assessment skills across its network are suspect).  Dishing out a loan is one of the easiest tasks known to man.  Recovering a loan from from the operational cash flows of a borrower is a less enviable task.

So are Yes Bank, IndusInd Bank and RBL the Snapdeal of Indian Banking? We don’t have an answer.  But investors would do well to remember that a banking institution can hide the fact that it is swimming naked for a longer period of time than a non-financing organisation such as Snapdeal.  Various artifices are available to a bank to hide  its poor asset quality that are not available to a manufacturing company.  Officially Lehman Brothers went bankrupt on the 15th of September 2008.   Its true date of bankruptcy was sometime in late 2005/early 2006.

Please Compare Forecast and Actual Happenings at Deutsche Bank

More than 4 years ago, we had forecast that Deutsche Bank was a house of cards waiting to unravel.  Readers are requested to compare the points listed in the piece   and actual happenings at the bank.

China Credit Apocalypse Playing out

Almost 3 years ago, in our post Credit Entropy and the China Credit Syndrome (, we had asserted that most of China’s big companies were unviable and the banking system was headed for a one way ticket to the zoo. That scenario is now being played out in front of our eyes. The interbank rate has shot through the roof on the news of big defaults. It is now time to worry about the creditworthiness of the world’s big mining companies, whose credit story has been closely correlated to China’s.

Invitation for Credit Analysis Notes from Readers

Dear Readers

I invite you to publish credit analysis notes at this blog site under your names. They must conform to this site’s motto of “No Bullshit Credit Analysis and Research”.

The Notes could be on

1) Credit Analysis of Sovereign Countries/ sub-sovereign entities

2) Credit Analysis of Companies

3) Developments that Creditors everywhere need to pay heed to.

Looking forward to receiving your contributions.

Will India’s Tata Group Survive?

In India, this question would be regarded as sacrilegious.   But the time has come to tot up the group’s assets and liabilities.  This is a must for any sensible investor before he plunges into the perpetual debt of Tata Steel and the Tier I and Tier II capital instruments of Tata Capital or Tata Motors Finance.  On the asset side, there is only the group’s holdings in TCS.  All the rest is liability.  No one wants to be seen dead in the ghastly cars that Tata Motors makes (the JLR bit alone cant bail out this company).  God only knows for how long Tata Steel can carry its leveraged capital structure before the edifice collapses.   Tata Communications requires Rs 1500 crores of annual bailout (the joint venture partner DoCoMo wants to get out- if the Tatas buy out the Japanese company, the bad situation would only get worse).  Though Indian Hotels has made losses recently, that company should survive once the economy turns.  The same cant be said with certainty about Tata Chemicals or the Tata group’s retail adventures.  Tata Power is a bottomless pit, guzzling cash faster than Ford’s Model T guzzled petrol.  Many of the group’s companies have not been shy about borrowing in foreign currency.  The recent fall in the INR is going to make things worse.  Credit investors who are investing in the debt instruments of the Tata group companies based on the AAA rating of Tata Sons assigned by the Indian arms of S&P and Moody’s should not look to those agencies for solace when the shit hits the fan.      

Deutsche Bank: The Chickens Coming Home to Roost

It has been almost two and half years since we had mentioned that Deutsche Bank was under reserving for litigation expenses (In our piece Deutsche Bank Creditor Concerns, March 2011).  Among the many reasons we had listed for asserting that the bank was woefully undercapitalized was

Litigation risk

It is doubtful that Deutsche Bank has sufficiently provisioned for the litigations it is exposed to. Only last week it lost a case in Germany for failing to advice a client properly on the true risk of a complex swap transaction. This litigation was not even mentioned in the 2010 Annual report. In the US, the bank has $ 588 million of outstanding mortgage repurchase demands on mortgages that were allegedly fraudulently securitized. More such demands could come up this year. The bank is also exposed to risk from the Auction Rate class action as well as the Trust Preferred Securities class action. It is unlikely that the bank will emerge unscathed from these lawsuits as the management wishfully claims.

Finally,  the chickens have come home to roost.  The Bank, in the  second-quarter, has set aside about 600 million euros ($796 million) to cover legal costs.  Wishful thinking can only go so far.

China Real Estate Revisited

About 3 years ago we had said that while the great investor Jim Chanos is usually right, he is wrong being pessimistic about the prospects of the Chinese real estate sector- particularly the high end real estate sector (See  We reaffirmed this conviction about a year ago (  

It seems that our expectation has turned out right.  Despite a sharply slowing economy, China’s June new home prices rose in all but one city, led by the biggest metropolitan centers.  Prices climbed in 69 of the 70 big cities last month from a year earlier, matching the data in May. The city of Guangzhou posted the biggest increase with a 16 percent advance from a year earlier. Prices climbed 13 percent in Beijing and 12 percent in Shanghai.  The Chinese real estate market bears no similarity to the US sub-prime market.  The US real estate market continues to be driven by leveraged investors using cheap credit provided by Bernanke.  The debt involved in real estate purchase in China is far lower than the US, and hence it is less likely there will be a panic in the sector. 

No need for Creditors to China’s Baosteel to worry, whatever S&P says

Yesterday S&P downgraded the credit rating of leading Chinese Steel producer Baosteel to BBB-.  Two years ago, in our piece Credit Entropy and the China Credit Syndrome ( we said the following about Baosteel:

God help any company competing with Baoshan Iron and Steel (Baosteel). Untrammelled by petty thoughts such as return on capital employed, and sustaining thanks to access to unlimited cheap credit, the only people who had the right to complain were the long suffering minority shareholders- the stock was at the same level that it was 7 years ago. Inner Mongolia Baosteel Union, a subsidiary of Baosteel, had negative return on capital employed in 2009 after a terrible performance in the previous few years. After a merger in 2008, Handan Iron and Steel overtook Baosteel to become the second largest Chinese steel producer. Like its other compatriots, the company is not overly fanatical about ROCE metrics.

Unlike S&P, we continue to assert that a creditor to Baosteel, particularly its Dim Sum bonds, has no cause to worry.  The Chinese state is not going to allow this entity to default.  

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