India

The economy has grown dependent on non-bank lenders.

Local funding remains constrained as providers pull back amidst a slowing economy.

High unemployment and a subued manufacturing sector will drive rate cuts.

Wholesale and housing finance companies are the most vulnerable.

This is more than double the $174.86m the bank disclosed as of 30 September.

RBI has limited sway over state-owned lenders, who control 60% of the banking sector.

The origination of the ongoing crisis of Non-Performing Assets (NPA) in India cannot be attributed to a single event nor can it be confined to a particular timeline. It was only in the mid 1990’s; post the economic liberalization when the country entered into the new millennium that the banks realized the sudden compounding of bad loans. The NPA situation essentially propelled in the mid 2000’s following over-optimism in the economy specifically between 2006-2008, on the back of strong economic growth and pending infrastructure projects completing on time and within specified budgets, a thing largely unheard-of till then. This irrational exuberance was followed by number of bad loans being advanced by the banks often by compromising due diligences. Riding on this positive environment, corporations were being granted loans based on recent performances and growth. Loans were being advanced at an alarming rate, and these corporations grew highly leveraged which led to most of the financing through external borrowings rather than internal equity. However, though post the global financial crisis of 2008, the bubbled economic growth stagnated and the repayment capability of the same corporations substantially decreased causing unparalleled financial stress on the banking and the corporate sectors. The strong projections for various projects started seeming unrealistic and it became increasingly clear there was no set structure in place to recuperate these loan advancements.

Deteriorating asset quality led to enhanced provisioning, reduced profitability and a subdued capital position has created a challenging period for the Indian banking system. Poor asset quality levels also necessitated capital infusion into several banks, especially in the government owned banks. Policy measures like resolution under the Insolvency and Bankruptcy Code (IBC) has helped the banks in recoveries of certain bad accounts. The government has taken decisive measures towards consolidation of the banking sector by creating fewer banks of significant size which would be easier to operate and capitalize. Further, the government has announced infusion of capital to enable transition of these banks.

The number of debit cards issued hit 605.3 million.

State banks would be hit harder.

Large NBFCs grew at a CAGR of 20% in FY2014-2019.

Lenders in India and Indonesia are most vulnerable to a deterioration in corporate debt repayment capacity.

Credit quality and capital shortfalls remain a key problem.

From 27, the total number of government-owned banks will be cut to 12.

Troubled finance companies will hold banks back.

The defaults of Infrastructure Leasing & Financial Services and Dewan Housing has investors spooked.