Outlook For Indian State Run Banks Beginning To Sour 28. June 2011 Rahul indian economy (1) Interest rates increases by the Reserve Bank of India, slowing credit growth and shrinking net interest margins are not the biggest of problems for the Indian State Run Banking Sector. The speed with which loans are going bad in an economy that continues to grow nominally at 13-14% per year are alarming. It started with concerns on lending to the real estate and infrastructure sector when things started going south. Then the telecom sector started wobbling and everyone realized that the billions on dollars that went into the governments coffers for 3G licenses essentially came from the banking sector in the form of loans to telecom companies. With telecom companies unable to make money even on their basic 2G services, the outlook for the 3G loan book looks poor. Loans to microfinance lenders are in trouble as are loans to shipping companies. Billions of dollars loaned to Air India for aircraft purchases are afloat solely due to government guarantees. The feedback from the ground is that loans to yarn mills and garment manufacturers are in trouble as well. Small and Medium sized lending has become a big problem area with companies going belly up at record speed. Ironically the few traditionally problematic areas that are holding up for banks are rural loans (farmers are flush with money given rising food prices), residential mortgages and consumer loans. Consumers are benefitting from rising salaries and a robust job market. But rural loans are always one bad monsoon away from turning sour. When banks that are leveraged 10 to 1 (all banks in India) lose even 10% of their asset book, their entire equity gets wiped out. In such a scenario, stock prices trading at or below book value offer little comfort.