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India’s Bad Loan Feast

June 19, 2017

Government sponsored IDBI Bank recently reported NPAs of 21%.  But that is not the most interesting aspect of IDBI Bank’s Earnings report.  The most interesting data was that more than 70% of the loans are consortium lending where IDBI Bank is just one of the lenders, the other lenders being other Public and Private sector lenders.  How is it then that other banks are not reporting similar sized NPAs?

It is not mysterious if one considers this fact in conjunction the reality that real economic growth in India at present is non-existent.  The credit growth reported by banks (mostly the private sector banks) has been for evergreening loans (basically new loan disbursements are used for interest servicing of existing loans).  There is negligible funding of new projects, which alone can cause growth.

In summary, Indian banks have become zombie banks like the Japanese banks of the 1990s when all resources (financial and managerial time) was spent in hiding bad loans.  This caused the lost decade of zero economic growth in Japan.  Unless the banking regulator forces Indian banks to recognize bad loans, the Indian economy is likely to witness very poor real growth (as opposed to statistical jugglery) over the medium term.

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From → Credit Analysis

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