Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

It's not often that the International Monetary Fund warns of a risk to global financial stability at its spring meeting in Washington, and almost immediately evidence jumps out of a bank earnings report in Mumbai.

That's what happened on Wednesday. The IMF released analysis showing an alarming buildup of vulnerable corporate debt -- the kind where operating profit is falling short of interest payments -- in India, Indonesia, China, Turkey and Brazil. And right on cue, Yes Bank Ltd., an Indian lender that raised fresh money from equity investors only last month, reported a near-doubling of its gross nonperforming assets to 1.52 percent at the end of March, from 0.85 percent in December.

India has many troubled state-run lenders; Yes Bank is not one of them. The spike in its soured loans is due to the cement units of Jaiprakash Associates Ltd. The builder of India's sole Formula One track is a distressed borrower with a U.S. currency bond due in September that's trading below 42 cents on the dollar. Its cement assets are in the process of being sold to billionaire Kumar Mangalam Birla, so Yes will probably get repaid after all.

Still, corporate leverage is a worry for emerging markets like India precisely because a disproportionately large chunk of it can be found on rickety balance sheets like Jaiprakash's. The obligations of companies that have an interest coverage ratio of less than one account for 22 percent of total debt in India, 17.5 percent in Indonesia, and almost 13 percent in China.

Protectionism Prospects
Already, 22 percent of India's corporate debt has an interest coverage ratio of less than one. That could rise by 6.7 percentage points in a worst-case protectionist scenario
Source: IMF Global Financial Stability Report, April 2017
Note: Shows emerging market corporate debt with an interest coverage ratio of < 1

Worse, as the IMF notes, a rise in global risk premiums alone would add $135 billion to this weak tail of debt distribution. Protectionism is the other way for the back end to get longer. The Trump administration's trade policies should matter less to commodity exporters such as Russia or Saudi Arabia, but China's corporate debt profile could weaken sharply.

Gone Sour
Nonperforming and problem loans have climbed in many countries, reflecting economic weakness (Brazil, Russia), and continued corporate leverage growth (China)
Source: IMF Global Stability Report, April 2017

Luckily for Indonesia, its banking system is in reasonably good shape. India, South Africa, Russia and China face a double whammy. Their lenders may not have enough profit -- or capital -- to absorb a further souring of corporate debt. After making additional loan-loss provisions, between 45 and 77 percent of corporate loan assets in these markets would be with banks that have Tier 1 capital ratios below 10 percent.

Another Cause for Worry
Heavy credit losses continue to erode profits at many banks, notably in Russia and India. Nonperforming and problem loans have also climbed, reflecting economic weakness plus a jump in corporate leverage
Source: IMF Global Financial Stability Report, April 2017

When it comes to company profitability, the weak tail of debt is already wagging the dog in India. If it grows any longer because of risk premiums or protectionism, other emerging economies may not be all that safe either.

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

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Andy Mukherjee in Singapore at

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