Finance & economics | Back in the dumps

India’s state-owned banks endure a string of bad news

A brief flurry of optimism in the sector comes to an end

Spot the $1.8bn
|MUMBAI
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OF LATE Indian bankers have felt an unfamiliar sensation: optimism. A 1.3trn-rupees ($21bn) bail-out from the government seemed to have cleaned up the bad lending decisions of years gone by. A new bankruptcy law gave them an edge in long-standing battles with recalcitrant borrowers. It seemed a few Indian companies, having for years eschewed fresh investment, might even start borrowing again.

This week woes linked to mismanagement at India’s three biggest partially state-owned lenders plunged the bankers back to their habitual gloom. On February 14th Punjab National Bank (PNB) announced it was investigating a fraud worth 114bn rupees, equivalent to about a third of its market capitalisation. A few days earlier the State Bank of India (SBI) unveiled its first quarterly loss since 1999. And Bank of Baroda has hastily announced the closure of its South African operation, accused of having shady business associations there.

The Punjab heist is potentially the most serious. The second-largest nationalised bank admitted that employees in Mumbai had approved transactions that left PNB on the hook for $1.8bn. This suggests, to put it mildly, some lacunae in how the place is run. Its shares fell by over 10% as investors tried to assess whether the sum had been lost or was merely at risk.

The bank has reportedly filed a complaint against a jeweller, Nirav Modi, and some of his family and businesses. Its accusation, to which Mr Modi has not responded, is that he induced bank employees to issue letters of credit, which were left off PNB’s books. The letters of credit seem then to have been used as security to borrow from other banks overseas. Mr Modi says he is willing to sell his businesses to make the banks whole.

SBI’s troubles are far easier to grasp. Like other state-owned lenders, which control about two-thirds of assets in the banking system, SBI has repeatedly had to adjust its quarterly profits to recognise that some loans made in past years are unlikely to be repaid. Losses linked to bad loans soared in the most recent quarter, in part because the Reserve Bank of India, the regulator, forced SBI to recognise even more of its loans as duds than it had done previously. The regulator did not say whether it regarded SBI’s management as negligent, or dishonest.

Finally, Bank of Baroda, the third-largest nationalised lender, on February 12th announced it would be pulling out of South Africa, one of a handful of markets it had entered in the past two decades. Its strategy of building its franchise by lending to the Indian diaspora had not reckoned with the Gupta brothers, three financiers accused of having undue influence in President Jacob Zuma’s inner circle. An investigation by the Hindustan Times and others detailed how Baroda stuck by the Guptas even as other banks pulled back. Baroda says it is co-operating with South African authorities, which are investigating.

The bad news has helped to wipe out half the share-price gains of the 21 state-owned banks after the government’s rescue plan was unveiled in October. Most are trading below the stated value of their net assets, implying investors still don’t trust their accounts. Taken together, all the nationalised lenders are now worth less than HDFC Bank, a single private lender. It may be some time before optimism returns.

This article appeared in the Finance & economics section of the print edition under the headline "Back in the dumps"

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