india economy review

Upload: varun-parakh

Post on 06-Apr-2018

219 views

Category:

Documents


0 download

TRANSCRIPT

  • 8/2/2019 India Economy Review

    1/3

    Indias economy

    Reflections of reality

    Does India have a bad-debt problem?

    A RITUAL familiar to students of the subprime and euro crises has started taking

    place on Indian banks conference calls with analysts and investors. The number-

    crunchers probe the lenders about their exposures to potential bad debts. Bankbosses insist that, although there are niggles, all is under control.

  • 8/2/2019 India Economy Review

    2/3

    Some scepticism is due. With Indias economy slowinggrowth could dip below

    8% this year, from a peak of 9-10%and interest rates rising (see chart),

    borrowers will be under more strain. Indias banks have been growing fast foryears, often a sign that discipline has slipped. Total loans have almost tripled since

    2005.

    The Reserve Bank of India (RBI), which regulates banks and sets interest rates, has

    a record of running a tight ship. Gross non-performing loans have fallen from

    about a fifth of the total in 1995 to under 3% today. But the RBI is neither

    infallible nor squeaky-clean. Between 2005 and 2008 some foreign banks and

    several local ones got caught by a mini-boom in unsecured loans to consumers that

    quickly soured. And since the start of the global financial crisis the RBI has quietly

    given Indian lenders some get-out-of-jail cards; these may pale into insignificance

    compared with perks doled out by Western regulators but they suggest that the

    central bank prefers to fudge the recognition of losses in the system if it thinksstability is at risk.

    In 2008, for instance, banks were allowed to restructure weak loans without

    recognising them as bad debts; these now account for 3-4% of all loans. Lenders

    have also reportedly been allowed to avoid booking losses on loans to Air India, a

    state-owned zombie. The stock of all provisions held against all non-performing

    loans is lower than in other countries, particularly at the state-owned banks that

    dominate the industry. That means there is less of a buffer before losses start to

    burn up banks capital.

    It is a big leap, though, from a slowing economy and a crafty regulator to a

    systemic bad-debt problem. India is not very indebted: at 55% of GDP, bank credit

    is far lower than in China, let alone rich countries. Banks dominate lending, so the

    risk of problems hidden in the shadows of the financial system is small. Companies

    dominate borrowing and their gearing is low. Aashish Agarwal of CLSA, a broker,

    says he is not too worried about borrowers suddenly being unable to afford interest

    payments. A recent RBI stress test simulated the sort of slowdown bearish

    economists now fear. It suggested banks overall would be largely unscathed.

    Rising rates will pinch, though. Stuart Davis, chief executive of HSBCs Indianarm, says there has been a surge in big firms borrowing abroad in dollars, which

    can be cheaper than doing so at home even once currency-hedging costs are

    included. High-profile allegations of graft could also affect banks: a handful of

    corporate customers, from telecoms firms to miners, are implicated in scandals,

  • 8/2/2019 India Economy Review

    3/3

    and if they end up being clobbered by the authorities, their creditworthiness couldbe hit.

    Many infrastructure projects, from roads to power plants, are stalled or reliant on

    public-sector customers which are bust in all but name and which enjoy uncertain

    backing from the state. Infrastructure loans have risen quickly to account for about

    15% of overall loansnot enough to bring the system to its knees, but enough to

    harm a handful of banks if any losses are unevenly distributed. India may not have

    the bad-debt problems of the rich world, or even China. But as elsewhere, its banks

    are a reflection of its economy, warts and all.