The default risk for Indian banks fell to the lowest level since 2011, as Finance Minister Palaniappan Chidambaram's $2.6 billion cash infusion added to signs the government will support lenders to bolster the economy.
The average cost of insuring the debt of five Indian lenders against non-payment for five years dropped by 217 basis points (bps) from last year's peak to 211, CMA data show. Credit default swaps on State Bank of India, the nation's largest lender, fell six bps to 196 in the week after the Budget, the most since January 11. The rate is still higher than the 85 bps on Bank of China Ltd contracts.
The budget's capital infusion will improve financial ratios at lenders and its acceleration of infrastructure projects will help reduce bad loans in road and power industries, according to Punjab National Bank, India's third-largest state-run lender. Chidambaram targeted growth of as much as 6.7 per cent in the year through March 2014 from an estimated five per cent in the previous period, driven by lending and corporate investment.
"The finance minister reinforced the government's commitment to provide enough capital for banks," K R Kamath, chairman and managing director at Punjab National and the head of the Indian Banks' Association, said by telephone on March 6. "That commitment from the government, which is also the largest stake holder, should address most of the concerns raised."
The swaps on State Bank, which some investors consider a proxy for the sovereign, slumped from a high of 405 basis points in 2012, according to data from CMA, which is owned by McGraw- Hill Cos. The measure has fallen each month since September, when the government began unveiling policies to revive an economy growing at the slowest pace in a decade. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Soured debt as a proportion of total bank lending jumped to 3.6 per cent in September, the highest in at least five years, the central bank said in a December 28 report. Lending increased 16.4 per cent in the 12 months through February 8 after slowing to 15.12 per cent in December, the weakest pace in two years.
Chidambaram pledged to add Rs 14,000 crore ($2.6 billion) to boost capital at state-run lenders. He also announced tax savings for companies investing at least Rs 100 crore in plant and machinery. He proposed measures such as simplifying financing rules for infrastructure companies and the appointment of a regulator for road projects, as the government seeks to attract $1 trillion to develop highways, power plants and ports in the five years through 2017.
"The government's focus on clearing impediments for infrastructure projects will help all banks," Kamath said. "Many projects we have funded aren't operational so far as they haven't got clearances or are facing fuel shortages. This renewed focus by the government along with our focused efforts will help recovery."
The tax incentive will boost lending and revive corporate investment from a six-year low, according to YES Bank Ltd, the best performer on the S&P BSE Bankex index this year, and Moody's Investors Service. The measure will lead to savings of about five per cent of the company's total spend, Moody's estimates.
"The companies will end up investing more," Vikas Halan, Singapore-based senior analyst at Moody's, said by telephone on March 4. "This makes a difference for even large companies like Reliance Industries
Ltd, whose capital expenditure over the last three years has averaged close to $3 billion, a level of spending which would save tax of $150 million a year."
Thirteen Indian companies rated by Moody's had average annual capital expenditure of $20 billion in the last three years. The budget provisions will help them save $1 billion each year, boosting their credit profiles, Halan said.
Investment by companies slowed to 10.6 per cent of gross domestic product in the fiscal year ended March 2012 from a peak of 17.3 per cent in 2007-2008, latest estimates from the Central Statistical Organisation show. This forced the government to keep spending at nearly eight per cent of GDP, resulting in a fiscal deficit estimated at 5.2 per cent, which Chidambaram aims to cut to 4.8 per cent by March 2014.
Record government bond sales to fund the gap helped push the yield on benchmark 10-year sovereign debt to as high as 8.78 per cent last year. The yield on the 8.15 per cent note due June 2022 has since dropped to 7.84 per cent as of March 8, and offers a premium of 583 basis points over similar-maturity US Treasuries. The rupee rose 0.5 per cent to 54.2925 per dollar on March 8.
"Incremental lending will pick up and cash accruals at companies will improve with these measures," M Narendra, chairman and managing director at Chennai-based Indian Overseas Bank
, said by phone on March 4. "The government's fiscal consolidation measures will also help in improving savings. Banks stand to benefit in terms of resource mobilisation."
Mumbai-based Bank of India
, the nation's fifth largest lender by assets, says the measures will help boost spending by small- and mid-sized companies and further reductions in borrowing costs will help increase demand for loans.