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A look at the threat facing the world’s fastest-growing large economy in six charts
WSJ.com
By Daniel Stacey and Kara Dapena
India is taking a series of aggressive steps to reduce the mountain of bad debts weighing down its banks and threatening to derail the world’s fastest-growing large economy.
India’s parliament last week passed a law empowering its central bank to force some of the country’s largest companies into bankruptcy proceedings. The move follows last year’s overhaul of the bankruptcy code, another attempt to make it faster for creditors to get their money back in a country notorious for drawn-out insolvency proceedings.
India’s efforts come as most of its state banks are struggling with extremely high levels of bad debts, which has dented their ability to make new loans. This, in turn, has pushed down the level of investment to a 13-year low and led economic growth to slow.
Below are six charts illustrating the scope of the issue facing the world’s fastest-growing large economy:
BAD LOANS ARE PILING UP
Indian companies borrowed at record levels a decade ago when the economy was booming. But when the 2008 financial crisis hit, many struggled to find the demand they had anticipated, and started falling behind on their loan repayments.
Last year, more than 9% of all bank loans were deemed nonperforming, meaning that repayments were overdue for more than 90 days. That is a significantly higher ratio than in the U.S. or in other so-called Brics—a group that includes the world’s largest developing countries—with the exception or Russia.
BANKS FACE ADDITIONAL PRESSURE
Compounding the issue, India’s state banks—which account for the lion’s share of the country’s banking sector—may have twice the amount of problematic loans on their books than currently reported, according to Credit Suisse estimates.
The investment bank puts that ratio at above 20%. That number includes restructured loans (loans whose repayment date or amount have been modified because the borrower struggled to repay) and problematic loans not recognized as such by banks (for instance, old loans that are being repaid with new loans), Credit Suisse said in a report released earlier this year.
Credit Suisse said only one of India’s 30-odd major banks had capital buffers large enough to deal with the issue. India’s finance ministry earlier this year said the banks’ bad-loan problem threatened to “derail India’s growth.”
LENDING GROWTH IS GRINDING TO A HALT
As bad debt piles up on their books, state banks are less inclined to make new loans. Private banks with better balance sheets have stepped in to lend more, but they represent only a fraction of India’s banking sector.
Overall, when adjusting for inflation—which averaged 4.5% in the fiscal year ended March—credit growth turned negative in the past financial year, and hit its lowest rate in 23 years, according to India’s finance ministry.
ATTEMPT TO MAKE LOANS CHEAPER IS FALLING FLAT
India’s central bank has tried to help boost lending growth by dropping its key interest rate by 2 percentage points since early 2015, but banks have responded with a measly 0.65-point cut in their base lending rate.
LENDING SLUMP IS HURTING INVESTMENT
As India’s state banks are reluctant to lower rates and lend, even healthy companies can’t borrow as much money as they would like to build or buy things.
As a result, corporate investment as a percentage of India’s GDP has fallen by more than 7 percentage points in the last five years, reaching a 13-year low last year.
ECONOMIC GROWTH IS SUFFERING
Lackluster lending and investment have started to drag down the economy. Last year, gross-domestic-product growth slowed by a percentage point to 7.1%, and shrank by another point again in the first quarter of this year, as manufacturing, agriculture and construction all contracted.
WSJ.com
By Daniel Stacey and Kara Dapena
India is taking a series of aggressive steps to reduce the mountain of bad debts weighing down its banks and threatening to derail the world’s fastest-growing large economy.
India’s parliament last week passed a law empowering its central bank to force some of the country’s largest companies into bankruptcy proceedings. The move follows last year’s overhaul of the bankruptcy code, another attempt to make it faster for creditors to get their money back in a country notorious for drawn-out insolvency proceedings.
India’s efforts come as most of its state banks are struggling with extremely high levels of bad debts, which has dented their ability to make new loans. This, in turn, has pushed down the level of investment to a 13-year low and led economic growth to slow.
Below are six charts illustrating the scope of the issue facing the world’s fastest-growing large economy:
BAD LOANS ARE PILING UP
Indian companies borrowed at record levels a decade ago when the economy was booming. But when the 2008 financial crisis hit, many struggled to find the demand they had anticipated, and started falling behind on their loan repayments.
Last year, more than 9% of all bank loans were deemed nonperforming, meaning that repayments were overdue for more than 90 days. That is a significantly higher ratio than in the U.S. or in other so-called Brics—a group that includes the world’s largest developing countries—with the exception or Russia.
BANKS FACE ADDITIONAL PRESSURE
Compounding the issue, India’s state banks—which account for the lion’s share of the country’s banking sector—may have twice the amount of problematic loans on their books than currently reported, according to Credit Suisse estimates.
The investment bank puts that ratio at above 20%. That number includes restructured loans (loans whose repayment date or amount have been modified because the borrower struggled to repay) and problematic loans not recognized as such by banks (for instance, old loans that are being repaid with new loans), Credit Suisse said in a report released earlier this year.
Credit Suisse said only one of India’s 30-odd major banks had capital buffers large enough to deal with the issue. India’s finance ministry earlier this year said the banks’ bad-loan problem threatened to “derail India’s growth.”
LENDING GROWTH IS GRINDING TO A HALT
As bad debt piles up on their books, state banks are less inclined to make new loans. Private banks with better balance sheets have stepped in to lend more, but they represent only a fraction of India’s banking sector.
Overall, when adjusting for inflation—which averaged 4.5% in the fiscal year ended March—credit growth turned negative in the past financial year, and hit its lowest rate in 23 years, according to India’s finance ministry.
ATTEMPT TO MAKE LOANS CHEAPER IS FALLING FLAT
India’s central bank has tried to help boost lending growth by dropping its key interest rate by 2 percentage points since early 2015, but banks have responded with a measly 0.65-point cut in their base lending rate.
LENDING SLUMP IS HURTING INVESTMENT
As India’s state banks are reluctant to lower rates and lend, even healthy companies can’t borrow as much money as they would like to build or buy things.
As a result, corporate investment as a percentage of India’s GDP has fallen by more than 7 percentage points in the last five years, reaching a 13-year low last year.
ECONOMIC GROWTH IS SUFFERING
Lackluster lending and investment have started to drag down the economy. Last year, gross-domestic-product growth slowed by a percentage point to 7.1%, and shrank by another point again in the first quarter of this year, as manufacturing, agriculture and construction all contracted.
