State Bank of India president Rajnish Kumar wants to reassure investors that he has control over the "demon" of lent loans. Not so fast, Aladdin.

The first quarterly earnings of the bank in 12 months is undoubtedly an encouraging sign, although a net income of $ 129 million from a loan portfolio of $ 284 billion is hard to celebrate. Moreover, it is premature that India's largest lender will clearly release asset quality if it has $ 20 billion over shadow financiers facing a liquidity squeeze.

So far, investors have focused on loans from state-owned Indian banks to large companies that were largely responsible for their bloated, inefficient progress. With the strong interest of buyers in distressed assets such as Essar Steel India Ltd. however, it is hoped that some of the losses already recorded in these accounts can be written off as profit. Other slip-ups could also be contained. The State Bank of India's NPA ratio improved to (still terrible) 9.95 percent in September, compared to nearly 11 percent in March.

However, it would be wrong to believe that the problem of poor lending in India no longer exists. State Bank's $ 600 million commitment to IL & FS Group, the infrastructure financier whose sudden bankruptcy has created a confidence crisis among non-bank financiers, is just the tip of the iceberg. The big shock will come when the State Bank raises $ 36 billion in advances to small and medium-sized businesses. This can happen when shadow financers are forced to reduce their own exposure to these borrowers.

Do not underestimate the political dimension. Government of Prime Minister Narendra Modi wants banks to approve loans from SMEs in 59 minutes. Sooner or later, it is guaranteed that such government-controlled loans end.

The other concern is that the problems of the shadow-lenders will affect the developers, some of whom may lose access to short-term funding. As the elections are due in May, the government finally wants the construction workers to go bankrupt, abandon projects and send construction workers back to their villages. Muted house prices could affect consumer sentiment. SBI has $ 79 billion in personal loans, including mortgages. The non-performing loan ratio for this group of borrowers is currently only 1.2 percent.

The alleviation of the liquidity crisis is ultimately the joint responsibility of the government and the central bank. But just when they should work together, the Ministry of Finance and the Monetary Authority are conducting a very public dispute.

The State Bank CEOs have claimed in at least eight different cases in recent years that the worst is over. Each time they proved wrong. With so many geniuses waiting to be bottled, Kumar should also be careful.

To contact the author of this story: Andy Mukherjee at

To contact the editor responsible for this story: Paul Sillitoe at

This column does not necessarily reflect the opinion of the editors or the Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist for industrial companies and financial services. Previously, he was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

© 2018 Bloomberg L.P.


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