A Sideshow in India's Bad-Debt Epic

Vijay Mallya's arrest is a sideshow in the nation's bad-debt epic.

There's an expanding bad-debt crisis in India. There's also a related spectacle surrounding the owner of a failed airline with $1.4 billion in unpaid loans. No prizes for guessing which makes for healthier television ratings.


The multiyear rise in India's soured bank debt shows no sign of abating

Source: Reserve Bank of India

Note: Ratio doesn't include restructured debt and unrecognized stressed assets.

Neither the Indian government nor the main opposition party lost much time in taking credit after Vijay Mallya, a beer tycoon and founder of Kingfisher Airlines Ltd., was arrested by Scotland Yard in London on Tuesday. Indian authorities are seeking to extradite Mallya, accusing him of fraudulently diverting a loan from state-run IDBI Bank Ltd. to buy properties overseas.

Never mind that this is only the beginning of a long-drawn-out legal and political process with no guarantee of success. From the reaction in IDBI Bank shares, which jumped more than 3 percent in eight minutes, one might have concluded that Mallya was already on a plane back home, checkbook in hand.

A Homecoming Hope

Investors pushed up shares of India's state-run banks on news Scotland Yard had arrested tycoon whose grounded airline owes $1.4 billion to lenders

Intraday times are displayed in ET.

The anchor of a yet-to-be-launched news network even issued a promo ad, promising to see the self-exiled businessman back in India soon. 

Even as the drama played out on Indian TV and social media, the central bank -- in a highly unusual move -- cautioned lenders on their exposure to the hyper-competitive telecom industry. The Reserve Bank asked institutions to make loan-loss provisions in case the dwindling profitability of wireless carriers made them the next big source of nonperforming debt after steel, power and infrastructure.

Already about 17 percent of banking assets in India are stressed. In the current fiscal year alone, as much as $13 billion of additional funds may need to be set aside, according to Credit Suisse Group AG estimates. Where will state-run banks, which have mostly stopped paying dividends to conserve capital, find such resources for advances that are yet to go bad?

Credit growth is down to 5 percent, from almost 25 percent in December 2010. Even bond trading is unlikely to provide much new profit. The yield on the 10-year risk-free note is again straining against the 7 percent mark after falling below 6.2 percent in the wake of the Indian government's Nov. 8 decision to banish 86 percent of the nation's currency.

Slowest in Decades

Credit demand in India has collapsed

Source: Bloomberg

Meanwhile, the regulatory assault on banks' "extend and pretend" accounting policies is intensifying, with the central bank asking lenders to disclose whether its audit unearths higher levels of stress than shown on their published loan books.

Naming and shaming so-called "willful defaulters" -- or making them face justice -- won't solve a $180 billion problem that's continuing to grow every quarter, ready to infect new industries. Worse, the yearning to see crony capitalists in jail could even obstruct resolution. As Gadfly noted last month, bankers are reluctant to dispose of bad loans at prices that would be fair to private-equity investors but too low for vigilance officers.

The more high-decibel the spectacle around Mallya, the slimmer the chance of a resolution to India's bad-loan crisis.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andy Mukherjee in Singapore at amukherjee@bloomberg.net

    To contact the editor responsible for this story:
    Matthew Brooker at mbrooker1@bloomberg.net

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