India banks cautious on mounting bad loans

Slowdown in sectors such as real estate fuelled more concerns of a potential further rise in asset quality issues.

India’s banks have begun sending out warning signals that a credit crisis worse than the one in 2008 could be just around the corner, according to analysts, bankers and credit rating agencies.

Non-performing assets are on the rise and have started showing up on Indian banks’ balance sheets. A lethal cocktail of record-high commodity prices, interest rates spiralling upward, weak markets and fear of a double-dip recession in developed economies has forced many Indian companies to restructure or default on their debt.

Indian banks have historically been well capitalised and were resilient through the credit crunch that led to the collapse of banking behemoths Lehman Brothers and Bear Stearns. However, for the first time since 2009, Asia’s third-largest economy is set to slow. The government recently cut its growth forecast to 8.2 per cent for the fiscal year to March 2012, from 9 per cent.

Analysts warn that unlike 2008, this time round the economic slowdown comes at a time when banks have already been piling up bad loans, putting extra stress on their balance sheets.

“We now think that the risk of asset quality issues arising in the banking sector has increased,” says Chetan Ahya, an economist at Morgan Stanley. A “slowdown in sectors such as real estate has already added to the concerns of a potential further rise in asset quality issues. There are [also] early-stage concerns on loan book quality issues for sectors such as non-banking financial companies and infrastructure”.

A recent report by IDFC Securities suggests at least 17 per cent of Indian banks’ outstanding loan assets could be on the verge of default. “Stubborn inflation, a spurt in interest rates and a slower economy are straining India Inc’s debt-servicing capacity,” it says.

View the full story in Financial Times.