Central Bank Warns of Reversal in India’s Bad-Loan Clean Up
The Reserve Bank of India (RBI) logo is displayed on a gate outside the central bank’s regional headquarters in New Delhi. (Photographer: T. Narayan/Bloomberg)

Central Bank Warns of Reversal in India’s Bad-Loan Clean Up

(Bloomberg) -- India’s financial regulator predicted that an improvement in banks’ bad-loan ratios will reverse, as a slowing economy hurts borrowers’ ability to repay.

In its latest Financial Stability Report released Friday, the Reserve Bank of India said soured debt at Indian lenders will rise to 9.9% of total credit by September 2020, after dropping the most in 15 years to 9.3% a year earlier. It had previously forecast 9% in March.

“This is primarily due to change in macroeconomic scenario, marginal increase in slippages and the denominator effect of declining credit growth,” the RBI said.

Central Bank Warns of Reversal in India’s Bad-Loan Clean Up

State-run banks need to boost buffers against disproportionate operational risk losses and private-sector lenders must improve corporate governance, Governor Shaktikanta Das wrote in a foreword to the report.

Gross bad loans at shadow banks also increased to 6.3% in September from 6.1% in March.

Central Bank Warns of Reversal in India’s Bad-Loan Clean Up

The authority, however, said the risk of contagion has eased from March, a time when any failure among the largest of the non-bank finance firms could have caused losses comparable to a collapse among the major banks.

The RBI’s assessment contrasts with warnings from Moody’s Investors Service and S&P Global Ratings, which see rising risks of contagion in the Indian financial sector amid a persisting cash crunch. The credit quality of Indian companies has plummeted to a record as Prime Minister Narendra Modi’s government struggles to revive economic growth from a six-year-low.

Other highlights from the report:
  • Risks to global and domestic growth have risen between April and September
  • Risk of a sovereign rating downgrade has risen
  • Liquidity and other financial market risks have eased

More than a year after a series of defaults by Infrastructure Leasing & Financial Services Ltd. forced the government to intervene and exposed weaknesses in the nation’s shadow banks, the sector is entering a new phase. In November, the RBI seized control of Dewan Housing Finance Corp., another troubled shadow lender, and said it would initiate bankruptcy proceedings against the firm.

©2019 Bloomberg L.P.

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