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.

Mortgages are perhaps the only specialist lending that will survive in India. Every other form of credit, especially subprime, is made so risky by the country's fickle policies and populist politics that it must eventually lose its independence in the safety of a deposit-taking bank.

Bharat Financial Inclusion Ltd., India's biggest micro-lender, is a good example. Bad loans at the rural financier surged to 6 percent of the total at the end of March, from 0.06 percent in December. Bharat's 5.3 million active borrowers, who use the funds to rear livestock or sell bangles, owe an average $240.

Smoke Gets in Your Eyes
After demonetization and loan waivers, India's biggest micro-lender has underperformed the largest state-owned commercial bank
Source: Bloomberg

The government's Nov. 8 demonetization, and a March state election fought on the promise of a loan waiver to farmers, probably make this the end of the road for Bharat Financial's independent existence. The board has authorized the CEO to appoint advisers "to explore the complete spectrum of strategic options," the Morgan Stanley-backed lender said after posting a $35 million quarterly loss, its first since overcoming a life-threatening crisis five years ago. (That debacle too, was of politicians' making.)

IndusInd Bank Ltd., backed by the billionaire London-based Hinduja brothers, is in advanced talks to acquire the micro-financier, Bloomberg News reported in March.

An Indian Subprime Crisis: Exhibit 1
Bharat Financial's bad loans surged past the worst recorded during the 2010-2012 debacle in the country's micro-lending industry
Source: Company reports

After India banned 86 percent of its currency stock, Gadfly flagged the risk to shadow banks' cash collection. Those concerns came to pass. Ujjivan Financial Services Ltd., which is in the process of becoming a small bank, said last week that its bad-loan ratio would have ballooned from 0.15 percent to 3.69 percent had it not been for the 90 days of extra time it got to classify an account as nonperforming. Even with the regulatory reprieve, NPAs almost doubled in three months, to 0.28 percent.

Demonetization was the first shock to the subprime economy, one from which Ujjivan is still recovering. But just when new notes began to fill the gap left by old ones, Uttar Pradesh, the most populous state, came up with a second blow: $5.6 billion of loan forgiveness. The rational response of farmers, even in other states, has been to stop repaying loans in case they, too, can secure a free pass. With a juggernaut of demands already rolling, the central bank's warning on moral hazard won't be a showstopper.

An Indian Subprime Crisis: Exhibit 2
Ujjivan Financial Services managed to avoid a bad-loan blowout thanks only to the 90-day grace given by the authorities on classifying nonperforming accounts
Source: Company reports
*Without the more relaxed norms on NPA classification, following demonetization.

As the banking regulator, the Reserve Bank of India is losing the most here. Credit growth in the country's stiflingly state-dominated banking system has collapsed to a multi-decade low under the weight of $180 billion in soured corporate debt.

If Bharat Financial and Ujjivan are any guide, even the RBI's strategy of letting a newer vintage of healthier private-sector players pick up the slack isn't doing too well.

What monoline lenders lack in deposit muscle, they make up for in their superior knowledge of borrowers and risk management. It's a shame that policy whimsy and cynical politics mean the specialists can't survive except as part of conventional banks.

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

To contact the editor responsible for this story:
Paul Sillitoe at