Bad loans: India ranks first in the world, surpassing Italy in dubious record

While Italy succeeded in quickly reducing its bad-loan ratio, with non-performing loans falling to about 200 billion euros ($227 billion) in 2018 from their peak of over 360 billion euros in 2016, India’s bad loans surged from 2.4 per cent in 2007 to 11.6 per cent in 2018.

India’s bad loans have given it the dubious distinction of having the worst non-performing loan ratio among the world’s major economies, surpassing that of Italy, according to a report in FE Online. While Italy succeeded in quickly reducing its bad-loan ratio, with non-performing loans falling to about 200 billion euros ($227 billion) in 2018 from their peak of over 360 billion euros in 2016, India’s bad loans surged from 2.4 per cent in 2007 to 11.6 per cent in 2018, the report said. 

Notably, the Reserve Bank of India (RBI) in December last had said that the ratio for banks fell for the first time since 2015, adding that it was still “high for comfort.” 

As India’s bad loan and stressed debt pile grew to $190 billion, it cast a shadow on the future of some lenders and also curbed investments. 

However, two laws – Insolvency and Bankruptcy Code (IBC) and the RBI’s Revised Framework for Resolution of Stressed Assets – (RFRSA), may have helped fix the problem to some extent in terms of improvement in recognition, deterrence, resolution and speed, the report quoted an article by Manish Sabharwal, Chairman of Teamlease Services in The Indian Express.

IBC plus RFRSA might have brought it down to 10.2 per cent, wrote Sabharwal in the article. 

RFRSA’s impact is visible from the improved identification of such bad loans  and a decline in the number of bad loans reported for recent quarters, the report quoted Sabharwal,.

The rising non-performing assets (NPAs)  of the banks hurts their asset quality. It appears the laws have resulted in improving the asset quality of banks, giving push to its credit and deposit activities, the report quoted Sabharwal.

“Of the 82 accounts resolved by the IBC, the average realisation by financial creditors was 48 per cent and average time taken for resolution was 310 days (versus World Bank estimates of 27 per cent and 1,580 days),’’ said Sabharwal.

While Sabharwal lauds the recent Supreme Court judgement of upholding the constitutional validity of the IBC, identifying the relative position of secured and unsecured creditors, and holding the line on Section 29A, he has raised some points of concern which are holding these policies back, the report said. 

He feels litigation hinders the resolution process with only 3 cases of the RBI’s first IBC list of 12, resolved so far. Moreover, only 63 of the total 1,484 cases admitted under the IBC are likely to be withdrawn under Section 12A, recovery rates still remain lower than global averages, and 31 per cent of the 898 ongoing insolvency cases at the end of 2018 have breached the 270-day deadline, the report said.

That said, these reforms have the potential to improve India’s productivity, wages and prosperity, the report quoted Sabharwal.

Source: FE Online


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