India must fix bad loan problem

India has warned about the risks of low and negative interest rates and “significant loan impairments” in the world banking system as it affects financial stability across the globe. Alongside disorderly deleveraging of private debt could also impact growth, said Finance Minister Jaitley addressing the annual World Bank and IMF meeting recently.

Further, he stressed that risks to financial stability persist because of low and negative interest rates and “significant loan impairments in the banking system. Undoubtedly, a profound statement as Jaitley called for early IMF quota review and recapitalisation of World Bank (WB) to enhance funding for pro-poor programmes.

Pertinently, this hits emerging markets wherein India itself is suffering because of IMF, WB, IFC and IDA reform delays. During the last fiscal year, fresh commitments delivered were only $3.8 billion as against the requirement of $5-7 billion. Consequently, the IMF-WB needs to be more agile and less expensive so that poor nations can enhance global growth. However, instead of going ahead with reforms scheduled for 2016 both put them off till 2019.

Interestingly, a significant aspect of the world economy is that India is doing much better even with low soft funding by the IMF-WB. Not only does its growth remain around 7.6 per cent but in fact, it leads growth in the sub-Continent which averages better than the rest of the world with Bangladesh at 6.3 per cent, Sri Lanka at about 5.3 per cent and Bhutan at 6.8 per cent. With better funding by international institutions, these nations could lead the world growth.

Besides, most other emerging economies are doing better though it remains uneven. This calls for enlarging the lending programme of IFC, IDA, IMF and WB. However, domination by the West and concern about large economies has withheld reforms. The globe is presently being stirred by Western nations whereby their banking system hits the world. An example, a sneeze in their system in 2008 (Lehman crash), largely due to low and negative interest rates and reckless grant of loans led to the collapse of their banking system, which spread beyond Lehman and US giant AIG.

Moreover, it also exposed that India too suffered the post-2008 crisis notwithstanding having no close banking links, the most. Thus, countries like India also have to be careful about the sermons they are giving to the world. Take our country, its banking system remains fragile as the banks are capitalised by the poor and salaried depositors. Hence, an upheaval in the system could have severe repercussions on the government’s programmes.

With low interest rates, large corporate funding and certain bank practices like asset quality review (AQR), loan restructuring have resulted in a sharp surge in bad debts, though technically these might not be non-performing assets (NPA). In addition, gross bad loans at commercial banks could increase to 8.5 per cent of total advances by March 2017 from 7.6 per cent in March 2016, according to the latest Reserve Bank of India (RBI) Financial Stability Report. It states, “If the macro situation deteriorates in the future, the gross NPA ratio may increase further to 9.3 per cent by March 2017.”

The resultant sharp surge in provisions for bad debts has eroded profitability, especially at State-owned banks, in recent quarters. The gross bad loans of public sector banks increased to 9.6 per cent as of March 2016, from about 6 per cent a year earlier, RBI data showed. The data also discovered that the relief the RBI was giving in repo rates – interest rates – to banks was not being transferred to the lenders and depositors were suffering cuts – a double whammy. In other words, banks were trying to cover up their losses at the cost of their depositors.

The country’s credit growth has also suffered. This indicates that in future the banks’ earnings might be hit. Low credit growth means the banks would earn less from lending. It is a king of warnings for the depositors. They might suffer a further cut in interest earnings. Clearly, India has to learn from its recent mistakes as well as what it is telling the world. Lenders have easy ways to default but depositors’ principal amounts are at risk. We have to fix the minimum deposit rates, which should be at 9 per cent. This would help depositors, decide floor lending rates and could be a saviour for banks.

By Shivaji Sarkar