A true reflection of India's bad debt problem

Indian banking system is regulated by stringent norms. The overall credit environment is not akin to the predatory lending practices as witnessed in the west. Strict lending guidelines, higher provisioning norms and stringent reserve requirements ensure that the banks are well equipped to absorb unanticipated credit risk losses. And the credit goes to Reserve Bank of India (RBI), which regulates the Indian banking industry. However, off late some sort of skepticism has crept into the Indian banking industry. With the total loan size trebling since 2005, potential bad debt niggles have started erupting. Higher interest rate environment has further put a strain on borrowers thereby impacting their repayment capacity. So, has junk credit crept into the system or is higher interest rate environment impacting the capacity of borrowers to repay? We think it's latter. Strict lending norms have ensured that gross non-performing assets (NPAs) of the Indian banking system are well below 3%. Thus, the possibility of junk debt creeping into the system is virtually zero. Although the proportion of unsecured loans increased during the credit boom (2005-2008) the overall ratio of such loans is low. So, how do banks manage to keep the bad debt problem under control despite increasing their loan books year after year? While part of the credit goes to stringent lending requirements we have to say that policy guidelines by RBI also have a role to play here. For instance, banks are allowed to restructure the loans given to risky sectors (real estate & construction) rather than classifying them as NPAs. Restructuring allows reclassification of an NPA into a substandard/standard asset. This effectively camouflages the true NPA scenario prevailing in the banking industry. Further, it may be noted that the banks are also allowed to avoid booking losses on loans given to a few state owned air-line companies (e.g Air India). It would be too premature to say that these provisions could ultimately lead to a systematic bad debt problem across the banking industry. However, it does conceal the true picture of the bad debt risk prevailing in the banking system. Nonetheless, it may be noted that India is not grossly indebted like western economies. Lending is mostly carried out by banks. Prevalence of shadow banking is negligible. Lending exposure to risky sectors like infrastructure and real estate is highly regulated and not permitted above a stipulated limit either.

Thus, India may not have a structural bad debt problem as witnessed by the western world but it is also true that the current picture is not an accurate reflection of the true problem faced by the country. By Equitymaster India's leading 'independent' equity research initiative. Trusted by over a million members all over the world, Equitymaster is known for its well-researched, unbiased and honest opinions on the Indian stock markets.

Comments
We all have seen, the so-called 2008 recession, the implication of which, indeed adversely impacted the EU, the US, other western developed countries etc.; but India survived it without much harm on its economy. There was a fall on its stock market, but our currency never depreciated much against the mighty (socalled) US$. None of our banks closed during the recession, but in the US? As explained above, our banking system, in RBI's control, is certainly a fool-proof system with its stringent norms, and well superior, when comparing with the developed nation's banking. The recent development is just an air-bubble. We don't depend on the US or EU anymore for anything. We have the potential to face any challenges. Let's face it. We are a mighty nation, we have the muscle power and money power to face any challenges? The current happenings in nutshell are silly to what we overcome in the past. Let's have confidence in our economy, in our banking system. It's not something like a castle made-up of playing cards, like the west, like the US. Agree with me friends ! Jai Hind. Yes. The role of RBI has been very important in controlling the economic scenario. However, continuous increase in the rate of interest in the name of control over inflation needs to be deliberated at length. I consider the policy of the GOI responsible for that. Inflation is caused by so many decisions mainly taken by GOI. Increasing ROI may put some control on liquidity in the hands of the consumer but indirectly put great damage on the growth path. Slow down of the industry and services, losing employment opportunites will aggravate social as well as economic conditions of the society. Never say never.We are an imitative people. There can be a scam at RBI and India will default just as badly. If politicians dont eat the money like now, especially like Sushma Swaraj, Suresh Kalmadi, K Karunakaran. If you see the life K. Karunakaran. He came as a drummer; now see the wealth of his family. This is for sure, all the politicians are just eating the money and fill their tummy only

and they dont ever do anything for the public.

If our Law changes and tracks these people of daily basis, then only we can save the money which they are handling it. Or else we should have centralized system to spend and received money. Then, only we can track these bed bugs that suck the money of the poor.

Anyway, this money is from the public and they save the money for their future and for their children. Indians never ever waste single money unnecessarily. They do have family relationship and their values. This is main reason that Indians are safe and secured. Anyway, pray that God may give eyes to the evil politicians those who suck the blood of poor. Pray also that God may bring Indian to a high position in coming day.

God bless India. inflation should be controlled at any cost.there is no point in having economic growth at the cost of social killing.rbi shd take all necessary steps on top priority tobring down inflation in some target time otherwise it will b havoc...bharat Dear readers all are commenting of getting corruption done away, i have been reading this for the last many years and nothing seems to happen, but only one thing corruption increasing day by day. As long as we have 101 parties this will never be possible in India, each party has a bunch of useless and uneducated politicians, they have never seen money and since they come to power with muscle and power they go on to rob us each single day, do we have the guts to unite and help people like Anna Hazare, unite with a big force and may be shut the country down not for a day but for a week or month, and then see the results will look better and some light will arise in getting corruption away, until such a thing happens dont expect the flith to go away, its sad that we are all living salves of the politicians. Truely said... the role of RBI in Indian banking system is which safe guard our Indian economy to some extend. Our leaders, irrespective of their political affiliation, should unite and work for the country rather than amassing wealth. If they do this now, we dont have to wait till 2020 to become a superpower, it will be a reality very soon.

whole indian should ask for enectment of lokpal law sothat everyone come under securtnity,,whoel present politician shouuld go to jail and whole foreign money should b brought back to india,people have right to know whoever bank account have in swissbank account.

Many debts are not catagorisind as Non Performing Accounts( NPA), where as they truely are non performing. Book adjusting of interests will show healthy figures. No interests will acrue or principle realised in many big cases. Some unquoted high up was saying" we are only postponing dooms day." So beware.