英文原文：Public banks under scrutiny
The economic picture in India continues to improve. Growth prospects look encouraging, and corporate earnings are starting to grow again. Even so, several areas of uncertainty should not be overlooked. Credit risks in the banking sector continue to increase, and public banks need capital to comply with capital adequacy ratios. The government will not be able to fully recapitalise them, and so it is essential for them to clean up their accounts before attempting to raise funds in the markets. At the same time, the government again failed to get reform of the goods and services tax through parliament in December's final session.
In the first half of the 2015-16 fiscal year （FY）, growth slowed slightly to 7.2% from 7.5% in the first six months of the previous fiscal year. Even so, since the second quarter, growth has accelerated significantly, and this is set to continue as businesses consolidate their finances.
Acceleration in growth
In the second quarter of the 2015-16 fiscal year, the pace of economic growth in India picked up to 7.4% compared with the same period of the previous year （vs. 7% in the previous quarter） on the back of upbeat domestic consumption and a sharp acceleration in public-sector investments. That said, net exports made another negative contribution to growth （-0.4 percentage points） owing to the 4.7% year-on-year decline in exports in Q2 FY 2015-16.
The latest economic indicators suggest growth has maintained the momentum it had at the beginning of the third quarter of the fiscal year. Industrial output recorded a 9.8% year-on-year increase in October, with the impetus coming from a steep rise in production of consumer goods （up 18.4% y/y） and also capital goods （up 16.1% y/y）. The increase in households’ purchasing power （as inflationary pressures have receded） underpinned personal consumption and vehicle sales （up 14% y/y in November）.
Even so, the crucial issue is whether businesses have already started or will start to invest again. In the second quarter of the current fiscal year, investments grew by more than 6.8% year-on- year, contributing 2.1 percentage points to growth. Nonetheless, this increase apparently reflects the rise in government investment rather than an upturn in investments by businesses. According to the government's budget figures, capital spending under its development programme rose by over 8% year-on-year in the first eight months of the fiscal year compared with the same period of the previous year. What's more, infrastructure and construction were the main sectors in which bank lending picked up pace, with road construction the stand-out performer.
Pressures on businesses easing
In Q3 2015, the state of businesses' finances improved owing in particular to the steep decline in their commodity costs. As a result, their net earnings rose by 7% year-on-year in Q3 2015, after declining in the three previous quarters.
In addition, businesses' financial position is less stretched following their debt reduction drive. In Q3 2015, 30.3% of their revenues before tax was devoted to paying interest, down from close to 36% in late 2014. As a result, their pre-tax revenues covered their Q3 2015 interest expense by factor of 3.3x, compared with just 2.8 times interest expense in late 2014. At the same time, businesses’ profit margins have increased. Net earnings （after tax） rose to 7.7% of revenues in Q3 2015 from just 4.3% of revenues in late 2014.
To sum up, although businesses' finances are in a fairly fragile state, they have improved since December 2014, paving the way for their investments to recover. Even so, several indicators tend to suggest that private investment has yet to pick up. Production capacity utilisation rates are declining, investment projects are on the decrease and investments halted rose in the third and fourth quarters of 2015.
Higher risks in the banking sector
Banks have not yet reaped any benefit from the improvement in businesses' financial position. The Reserve Bank of India's latest report points to a further rise in credit risk. Doubtful and restructured loans amounted to 11.3% of lending at end-September 2015, up from just 6% in 2011. Public-sector banks （which hold 75% of bank assets） account for the bulk of loans at risk. The ratio stood at 14.1% at end-September （vs. 8% in 2011）, compared with just 4.6% for private-sector banks and 3.4% for foreign banks.
What's more, loans at risk are concentrated in industry and in five sectors of activity in particular - mining, steel-making, textiles, infrastructure and aviation. These sectors of activity alone account for 53% of loans at risk, yet just 24.2% of total banking sector lending went to businesses operating in them. Infrastructure and aviation are the sectors with the highest exposure （with respectively 61% and 24% of lending to them classified as being at risk）.
The RBI estimates in its latest financial stability report that public- sector banks’ provisions would not suffice to cover their losses （estimated at 3.8% of total loans） were the economic and financial environment to deteriorate significantly1. 19 of 60 banks are said to be concerned, and they hold 36.2% of bank loans （compared with just 16 in June 2015）. What’s more, five banks （accounting for 2.4% of bank loans） would have losses exceeding their capital.
At the same time, banks' profitability declined. ROA and ROE slipped to 0.7% and 8.5% in September 2015, down from 1.1% and 13.6% in 2011. Earnings after tax contracted by 4.4% in the first half of the FY 2015-16 - owing in particular to the steep rise in provisions （22.2%） – and the contraction worked out at 22.7% for public-sector banks.
By the end of September, the capital adequacy ratio for the banking sector as a whole was mere a 12.7%. Even so, the situation varies tremendously from one bank to another. It stood at 11% for public- sector banks, but many of them have a ratio of around 10%, while their private counterparts average 15.5%.
To improve their capital adequacy ratio, especially after the deterioration in their asset quality, the government injected INR 200 bn in August and will pump in another INR 50 bn by March 2016 （representing a total of USD 3.5 bn）. Yet these capital injections fall well short of banks’ actual needs, even taking into account the additional INR450bn （USD 6.4 bn） due to be injected by March 2019 （INR 250 bn in FY 2016-17 and INR 100 bn in FY 2018 and FY 2019）. The government itself believes that it will need to come up with another INR1100bn （USD 16 bn）. Fitch, the rating agency, estimates that Indian banks critically need around USD 140 bn to meet the latest regulatory standards laid down by India’s central bank and to cope with higher rates of payment default. Of this INR 140 bn, Fitch estimates that the top five public-sector banks will need to be given over USD 67 bn.
As things stand, it is impossible for the government to inject all the capital that public-sector banks need to meet the regulatory standards laid down by monetary authorities by the 31 March 2019 deadline2. Given the state of the public finances, it cannot afford to do so, especially against a backdrop of fiscal retrenchment. Banks will have to raise capital in the financial markets, and for the time being, that appears a big ask given their financial condition.