Photographer: Dhiraj Singh/Bloomberg

Why India's Zombie Debt Imperils Modi's Plans: QuickTake Q&A


The economy in India is growing faster than just about anywhere else. But there’s a threat to that expansion, one that the authorities are struggling to address: the mountain of bad debt at the nation’s banks. Those soured loans have contributed to a $191 billion pile of zombie debt that’s cast the future of some lenders in doubt and curbed investment by businesses. In the latest push for a solution, the central bank has been handed extra powers over lenders.

1. How big is the problem?

The amount of stressed assets at India’s state banks exceeds the value of the banks themselves, according to a McKinsey & Co. report. Provisions made for bad debt by all banks -- private and state -- undershoot by $93 billion the total of stressed assets (which mostly are bad loans and restructured loans). As McKinsey put it, “as these stressed assets continue to turn bad, the entire equity base of the banks could be at risk.”

2. How’s this impacting the economy?

Credit growth in Asia’s third-largest economy has dropped to a 25-year low. In other words, the quantity of new loans that over-leveraged businesses are willing to take and that under-provisioned banks are willing to give, is slowing. Investment by private companies actually started to shrink in the year through March and will, by the government’s estimate, contract by more than 7 percent this financial year. That’s threatening to derail Prime Minister Narendra Modi’s much-vaunted economic plans.

3. Why is India growing so fast then?

It’s true, India’s gross domestic product is forecast to expand about 7 percent this year, the fastest rate among the world’s major economies. (Although some question the numbers.) Unlike in the U.S., where the pre-financial crisis boom was fueled by housing, India was plowing its money into productive assets such as power plants. That’s allowed the $2 trillion economy to prosper even as the banking sector got bogged down. Extra government spending has also cushioned the impact of that declining private investment.

4. How did the debt problem arise?

Among the reasons for the surge in bad loans: a slump in commodity prices, a lack of appropriate legislation and regulation and a rapid buildup of excess capacity in industries such as telecoms and cement. Four industries account for nearly 80 percent of stressed assets: power, steel, textiles and engineering/procurement/construction. About 70 percent of the bad debt is held by state-owned lenders, the legacy of an investment spree that soured after the financial crisis.

5. What’s been done so far?

The government pumped 930 billion rupees ($14.4 billion) into state-run banks from 2009 to 2016 and may need to inject a further 750 billion rupees by 2019, McKinsey says. Fitch Ratings Ltd. says 5.8 trillion rupees is needed to recapitalize the lenders. The banks have been required to reveal bad loans and a restructuring program has been put in place. Parliament passed a bankruptcy code in May 2016, but that faces bureaucratic challenges: a debt-recovery judge in India clears about 360 cases a year, compared with 2,895 by a U.S. counterpart, according to one study. Try as India might, solutions to the debt crisis have so far remained elusive.

6. What’s next?

In May, the government amended a law to give the Reserve Bank of India, the country’s central bank and financial regulator, the power to set up panels to vet non-performing loans and prompt lenders to take writedowns. It’s a welcome policy move, writes Bloomberg Gadfly’s Andy Mukherjee, but the courts may struggle to handle the workload. The RBI aims to settle as many as 100 cases by 2019. In a country where the World Bank estimates only 26 cents is recovered on every dollar of defaulted debt, some banks face significant writedowns.

7. Which banks are most affected?

Lenders including Bank of India, IDBI Bank Ltd., Indian Overseas Bank and Syndicate Bank have been downgraded by international credit assessors. And IDBI Bank became the first lender to fall under the central bank’s so-called tightened Prompt Corrective Action, which could force banks to curb lending or merge with stronger firms. ICRA Ltd., a unit of Moody’s Investors Service, said 17 lenders may follow IDBI Bank in facing restrictions on lending.

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