Here’s how bad India’s bad loan problem is. Hint: It’s far worse than China

A loan becomes non-performing or bad when a borrower stops repaying either the principal amount or the interest.

In India, liquor baron Vijay Mallya became a wilful defaulter of Rs 9,000 crore and Sahara’s Subrata Roy failed to pay Rs 36,000 back to banks, but the country’s bad loan story does not end with these high-profile cases; it is far worse — worse than China, as was pointed out in a recent presentation by the Lloyd George Management — a Hong Kong-based asset manager.

In 2016, India’s loan defaults were at 9.2% of the total gross loans, while that of China stood at just 1.7%, according to the World Bank data on nonperforming loans. And while in 2017 so far, India has inched closer to the 10% mark in terms of bad loans as a proportion of the total, China has stayed a tad below 2%. A loan becomes non-performing or bad when a borrower stops repaying either the principal amount or the interest.

Source: World Bank

Growing bigger

According to 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. As compared to its biggest economic competitor China, the proportion of bad loans in India in the year 2016 was as much as more than five times that of China.

Moreover, China ensured that the percentage of bad loans remain consistent over the years — a case which was not with India. 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%. India’s total bad loan stood at Rs 7.7 lakh crore at the end of March 2017.

Source: World Bank

Widening gap

The trend of bad loans in India and China is only widening the gap between the two countries. In India, power, steel, road infrastructure and textiles sectors are the biggest loan defaulters of state-owned banks. According to CARE Ratings, the gross non-performing assets of state-owned banks surged 56.4% to Rs 614,872 crore in 2016. In this respect, India fares worse than not only China but other countries as well, including the US and the UK. However, Pakistan’s bad loan percentage is bigger than that of India.

According to IMF financial soundness indicators for July-September quarter for last year 2016, the percentage of bad loans for Pakistan stood at 11.3% followed by India at 8.6%. Rest of the countries — China, Japan, USA and UK reported their bad loans below 2%. Even Sri Lanka’s bad loan was below 3%. Countries like Russia (9.65%), Hungary (9.97%), Nigeria (11.73%), Ukraine (30.37%), Greece (36.99%) reported higher bad loans than India.

Source: IMF financial soundness indicators

Most economists feel that there are two main reasons behind India’s increasing bad loans: first, slower revenue growth; second, higher interest rates. According to the World Bank, India, on an average, takes over four years to declare a company insolvent, which increases the risk of not recovering that amount, while China and the United States take less than half of that time. India only recovers 25% for every dollar, while China recovers 36%.

The road ahead

To deal with India’s rising bad debts, India introduced Insolvency and Bankruptcy (IBC) Code in May 2016, consolidating the existing framework by creating a single law for insolvency and bankruptcy, which is expected to ensure time-bound settlement. The effects of the law have already started emerging. Corporate giants like Jaypee Infratech, Essar Steel, Reliance Communication Ltd and start-up Stayzilla are already facing the heat of the IBC law.

Perhaps, India could learn little more from China in this regard. China has a stringent strategy to ensure lower bad loans. The country has introduced bank reforms to strengthen them to reduce the risks. Moreover, China does strict asset-based securitisation before lending money even to bigger players.