India’s bad loan problem ranks among the world’s worst

Time to pay up.
Time to pay up.
Image: Reuters/Rupak De Chowdhuri
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With a pile-up of bad loans, Indian banks seem to be winning the wrong race.

The non-performing assets (NPA) accumulated by Indian lenders are higher than those of banks in most major economies, including the US, UK, China, and Japan. In fact, India ranks fifth out of 39 major world economies plagued by bad loans, according to a report by Care Ratings.

Countries with higher NPA ratios (to the total loans) than India’s are part of the distressed PIIGS group—Portugal,  Italy, Ireland, Greece, and Spain. These five euro zone nations have faced immense economic and financial stress for a decade now, with several steps having been taken to restore their health.

However, unlike them, India has been growing in the last few years even as lenders have come under pressure due to unpaid dues. While the worst may be over, the problem itself is far from disappearing.

Gross NPAs increased to 10.2% in September 2017, compared to 9.6% in March, according to the Reserve Bank of India (RBI), which has cautioned against further deterioration as gross NPAs could inch up to 10.8% by March 2018. Earlier this month, the International Monetary Fund warned of an impending shock to the banking system if that happens.

In the past, the RBI and the government have flagged this and come up with several steps, including the insolvency and bankruptcy code (IBC), to handle the situation. Allowing faster resolution of bad loans, the IBC, which came into effect in December 2016, is expected to be a game changer.

“Quite clearly the IBC/NCLT (National Company Law Tribunal) has its task cut out to lower these numbers and make the system more robust,” added the Care Ratings report.