India has joined the dubious league of nations with high bad loans. Is it what India should have aimed for?
The seriousness of the problem posed by bad loans to India can be made out of the fact that only four countries have higher non-performing assets (NPAs) than it. The nations with higher NPA ratios than India are part of the PIIGS group – Portugal, Greece, Italy, Ireland. Even Spain,that lately applied to European Stability Mechanism for a €100 billion rescue package, has lower bad loans than India. Interestingly, these four are those European nations which got affected with the bad-loan problem during the multi-year debt crisis that has been taking place in the European Union since the end of 2009. In case of India, the bad-loan problem can be broadly said to be a self-inflicted malaise that got triggered by banks loaning to sick companies. India’s NPA ratio (which excludes the restructured assets which are around 2% higher than NPA) of 9.85% is one of the highest in the group of those nations which have very high non-performing assets, as per a report by ratings agency CARE. The 4 major economic drivers in the developed world – UK, USA, Japan, and Germany – have bad loan ratios less than 2%. Within the emerging economies, China, Argentina, and Chile have low ratios of between 1-2%. France has a higher NPA ratio of 3.41% among the developed nations. Brazil and South Africa, which are part of the BRICS Group of nations, have moderately high ratios of 3.69% and 2.83% respectively.
The CARE report says, “The seriousness of the NPA problem can be gauged by the absolute level of impaired assets in the system. Ever since the RBI had spoken of asset quality recognition (AQR) in 2015 there was an increase in the pace of recognizing these assets.” According to the latest available World Bank nonperforming loans data, India’s loan defaults were at staggering 9.2% of the total gross loans in 2016, second-highest in Asia after Pakistan (11.3%). A loan becomes non-performing or bad when a borrower stops repaying either the principal amount or the interest. According to the data on bank nonperforming loans by different countries maintained by the World Bank, India’s picture is not just bad but it is also worrying. India’s bad loans have surged drastically in the past six years. In 2011, India had just 2.67% of bad loans, which surged to 5.88% in 2015. The sharpest rise came in 2016 when the bad loans shot up to 9.18%. The bad loans in India rose from 7.7 lakh crore at the end of March 2017 to 9.5 lakh crore at the end of June 2017.