Bad Loan Ratio Set to Jump to Two-Decade High at India’s Banks
India Bad-Loan Ratio Set to Worsen to 12.5%, Central Bank Warns.
(Bloomberg) -- The bad loan ratio in India’s banking sector is forecast to swell to the highest level in more than two decades after a prolonged lockdown hurt businesses and left millions jobless.
Soured assets will rise to 12.5% of total advances by March 2021 -- highest since the financial year started 1999 -- from 8.5% a year earlier, the Reserve Bank of India said in its semiannual Financial Stability Report on Friday. It warned that if the macroeconomic environment worsens further, the ratio may escalate to 14.7% under the very severely stressed scenario.
“The outlook remains highly uncertain,” Governor Shaktikanta Das said in the report’s foreword. “The financial system in India remains sound; nonetheless, in the current environment, the need for financial intermediaries to proactively augment capital and improve their resilience has acquired top priority.”
Indian banks already have one of the worst bad-loan piles among major economies, and any deterioration would hurt their capital buffers and make it more difficult to extend credit just when companies need it most. A moratorium on loan repayments is providing some cushion for struggling businesses, but lenders may find a wave of loans turning bad after that relief ends in August.
The RBI’s projections are close to estimates by S&P Global Ratings, which predicts India’s bad loan ratio will rise to 13.2% next year. The regulator forecasts banks’ capital ratios will erode to 13.3% by March from 14.6%. This may worsen to 11.8% in a very severe stress scenario, in which situation five banks may fall short of meeting the minimum capital requirements of 9%.
Indian lenders from ICICI Bank Ltd. to Axis Bank Ltd. have announced plans to raise billions of dollars selling shares to boost capital as they brace for more spoiled loans.
The RBI warned that the freeze on loan repayments “may have implications for the financial health” of banks going forward. The impact of the moratorium on some shadow lenders could be substantial, with an average 39%-65% of their loan book frozen, the RBI said.
“The challenges that lie ahead have to be addressed with the overarching objective of preserving long term stability of the financial system,” Das said. “We need to remain extremely watchful and focused.”
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