From bad to worse - India suffers from a bad debt-ridden banking sector

Chinese authorities have been blamed time and again for their reporting of tempered economic data. The lack of transparency has prompted observers to never take Chinese authorities’ economic claims at their face value. Recently, Central Bank of India under its review, conducted in September last year, discovered a bad debt crisis in banking sector of India which totaled to around 8% of the GDP. The non performing loans or Bad Debts have risen to a total of about 5.9% of total loans in India, which is fare worse in comparison to the Chinese number of 1.5%. Banks were finally forced to solve the imminent crisis after Central Bank issued directives for bank to clear up their balance sheets by March 2017.

However, the numbers issued identified by the Central Bank review are far from the real bad debt position of the banks in the Indian economy. The confidence in the better run, privately held banks of India received a major setback last week when the financial disclosures form three banks revealed that the real numbers have increased the bad debts by 57%. Contrary to what the CEO’s of the trio have been telling to their investors and authorities. Disclosures form ICICI Bank, Axis Bank and Yes Bank this month reported a $3 Billion increase in the bad debts and NPLs compared to their disclosures in the March of last year. Although, this $3 billion addition may not have that big an impact on the total number of $180 billion outstanding bad loans, which includes both the restructured and non performing loans.

As a result, Indian banks have some of the highest levels of bad debts in the list of emerging markets around the world. Banks are so stretched that they are not even able to lend to the healthy corporate, holding back the economic growth. India is fastest growing economy in the world at present moment; however the businesses are facing a problem to get financing from banks. The problem started two decades ago, from 2000 and onwards, Indian corporate went on a shopping spree, picking up assets form home and abroad. Banks agreed to pay loans for investments which made no sense at all – such as Formula One track which lies on the outskirts of Indian Capital and has been abandoned after just holding three races.

The recent arrest of Indian business magnate, Vijay Mallya highlighted the bad debt problems in India as the tycoon was booked for his unpaid debts to the State Bank. The multimillionaire was arrested form London last month where he fled last year amidst allegations of fraud and defaulting on banks for amounts worth more than $1billion. But the crisis is far from over. The bad debt crisis may cripple the economy when India is poised to grow at a yearly rate of 7%.

However, after a year since the central bank issued directions for banks to fix their balance sheets. The problem looks far from over. To make matters worse, the recent financial disclosures form major banks have pushed India’s Debt situation from bad to worse. Government authorities are trying to find an amicable solution to the problem. Arun Jaitley, the Finance Minister of India has been considering a range of options from setting up a bank which can inherit the bad loans to setting up asset management companies to tackle the problem. But not everyone is optimistic that there is way out.