India’s Systemic Risk Remains Range Bound, Says Nobel Laureate Robert Engle
Bankruptcy reforms may be one part of the solution, Engle said.
Systemic risk across India‘s financial institutions has remained range bound despite recent attempts to improve the level of capitalisation across the country’s state-owned banks, according to Nobel Laureate Robert Engle.
India’s systemic risk has remained at the same level for about eight to nine years and hasn’t improved or deteriorated, Engle said while delivering the annual RH Patil Memorial Lecture organised by the National Stock Exchange on Tuesday.
When ranked relative to other developing and developed economies, India features somewhere in the middle in terms of risk, according to Engle’s research. China, Japan and the United States rank among major economies with high SRISK.
Systemic risk or ‘SRISK’ is a measure of the under-capitalisation of financial institutions estimated from a stress test computed by the NYU Stern Volatility Institute. Engle is director of the institute. By aggregating SRISK across a country’s economy, Engle believes one can estimate the relationship between projected capital shortfalls and the likelihood of a financial crisis.
SRISK is interpreted as the amount of capital that a financial firm would need to continue to function normally if there is a global stock market decline of 40 percent over the next six months.
The bulk of the SRISK for India is embedded in State Bank of India, said Engle. The bank, however, is government-owned and is therefore not seen at risk of failure. This holds true for a large part of the Indian banking system.
In economies like India and China, where many financial institutions are state-owned, the pressure for an under-capitalised financial firm to deleverage is reduced as it can expect financial help in a downturn, explained Engle. However, this under-capitalisation may still be contributing to the risk in the Indian economy and the financial system, he added.
Bankruptcy reforms may be one part of the solution, Engle said.
The Indian government pushed through bankruptcy reforms and recently the Supreme court rejected a lower court ruling, allowing the bankruptcy procedures to continue. However, excessive red tape and interminable judicial schedules make it difficult for banks to deal with non performing loans. The decision in the recent Essar Steel case is important in this regard, Engle said.
Still, much remains to be done to reduce the backlog of bad loans at India’s banks, according to Engle.
The Indian banking system has the highest level of bad loans across major economies. Gross non performing assets stood at 9.1 percent of total banking system assets as of March 31, 2019, according to data from the Reserve Bank of India.