Step Aside Italy: India Is Emerging As Ground Zero Of The World's Biggest NPL Crisis

While bad loans in the Italian banking system have received a ton of attention from investors who fear that the Italians could inadvertently blow up the European banking union, it's not the only financial landmine lurking among the world's ten largest economies. To wit, while Italy has the largest percentage of non-performing loans among the world's largest economies, India isn't far behind and India's economic recovery is built on an even shakier foundation.

According to Bloomberg, India's $1.7 trillion formal banking sector is presently struggling with $210 billion in bad loans, most of which are concentrated within its state-owned banks. During the 2018 fiscal year, growth slowed to 6.7%, down from the previous year's 7.1%, back to its levels from 2014, before Modi came to power.

The state banks have been so badly mismanaged that some analysts say the country's banking crisis is an opportunity for private sector banks, as CNBC reported.

"If you take a 10-year view, currently the private sector banks' market share is 30 percent. Probably it will become 60 percent," Sukumar Rajah, senior managing director at Franklin Templeton Emerging Markets Equity, told CNBC.

As a result, he said, "the overall health of the banking system will improve because the better banks will be a bigger portion of the market and the weaker banks will become a smaller portion of the market."

Some also see opportunities for investment bankers looking to underwrite corporate bond issuance in the country..

"My view is that, incrementally, a lot of long-term financing of corporate India can also be met by the corporate bond market, which has developed reasonably well," he said.

"Between the corporate bond market and the private banks, I think most of the requirements can be met as far as corporate India is concerned." When it comes to lending directly to individuals, Prasad said that is mostly done by the private banks and non-banking financial companies.

Supposedly, "reform" Prime Minister Narendra Modi has tried to force state-owned banks to make genuine oversight improvements. Still, they've continued to struggle. Late last year, Modi's government authorizeda $32 billion "recapitalization" (bailout?) from Modi. His decision led to a rally in India's Sensex equity index that was led by the banks.

But unfortunately for investors, the happy times weren't built to last. In February, a scandal of historic proportions exploded into public view. State-owned PNB bank revealed that employees inside its Mumbai branch helped facilitate the largest banking fraud in India's history, a fraud involving nearly $2 billion in loans to companies that didn't exist.

What's worse, thanks to the banks nonexistent internal controls, nobody realized what was happening for more than six years.

Since then, PNB has promised to improve its internal monitoring, and has quietly closed the Mumbai branch. But PNB has lost half its market capitalization and other state-owned banks have also been hid hard. So far, Indian authorities haven't been able to recover the stolen cash or arrest the culprits - who remain in hiding abroad. But confidence in state banks has hardly improved.

And that's a huge problem, because the country's state banks do the bulk of the country's lending. And they also hold nearly all of the Indian banking system's bad debt. 

India

The problem has shaken confidence in the entire Indian economy, evidenced by the fact that the Indian rupee just hit a new record low.

Rupee

Eventually, when the NPL reckoning is finally resolved, the country's GDP will crumble as credit freezes up. And lest you thought this was a storm in a teacup, it appears the shareholders of the world's most systemically important banks disagree and are selling with both hands and feet...

Banking

And the last time GSIBs tumbled at this pace, the world's central banks suddenly re-accelerated their money printing and saved the world...

Banking

What will save the banks this time?

Comments

sun1616 south40_dreams Wed, 07/04/2018 - 22:17 Permalink

Run RUN Zero-hedge community, the world is coming to END ,,,,,,since 2009 ,,,,,,when was last time  Zero-hedge posted positive article ??? some companies like Amazon, Facebook, Apple, Tesla has added Trillion dollar valuation but Zero-hedge poster thinks world is coming to end and missed the boat. Millions of people's life are improving in Asia and Africa due to internet, power etc  but here you will find nothing but negativism on everything.

In reply to by south40_dreams

cwsuisse sun1616 Thu, 07/05/2018 - 00:20 Permalink

This comment is quite non-sensical. Bad debt is someones equity gone sour. The valuations of Amazon, Facebook etc.etc. are to a large part not based on earnings growth but on purchases by the central banks (please see the annual report of the SNB-Swiss National Bank). Equity is destroyed large style and assets move to the balance sheets of central banks. We are watching (to the extent we are watching) an extremely dangerous development - the resurrection of some kind of communism with elements of an oligarch society. Whoever likes this perspective may go on and herald the development.  

In reply to by sun1616

U4 eee aaa cwsuisse Thu, 07/05/2018 - 00:33 Permalink

Apparently, he also missed the part about those same companies borrowing trillions of dollars to buy back their own stock. He either does not understand stock manipulation or is cool with it. At least he came to the right place to learn.

 

I can wait for that Aha! moment.

 

Remember when we called the 2009 housing bubble? Yes we did

In reply to by cwsuisse

WelfareFTW Wed, 07/04/2018 - 20:22 Permalink

India will be fine. It is ideally suited to be a peaceful anarchist society at the micro level and is able to weather these types of macro-shenanigans easy. It's the DNA that has allowed for a multi thousand year uninterrupted civilization.

sun1616 WelfareFTW Wed, 07/04/2018 - 22:19 Permalink

Run RUN Zero-hedge community, the world is coming to END ,,,,,,since 2009 ,,,,,,when was last time  Zero-hedge posted positive article ??? some companies like Amazon, Facebook, Apple, Tesla has added Trillion dollar valuation but Zero-hedge poster thinks world is coming to end and missed the boat. Millions of people's life are improving in Asia and Africa due to internet, power etc  but here you will find nothing but negativism on everything. People used to die from hunger in the past, 90% American's life is better than many kings used to have still they have unlimited complaints.

In reply to by WelfareFTW

Ghost who Walks SMD Thu, 07/05/2018 - 01:36 Permalink

Good pickup SMD.

It cannot possibly be that low.

When I did an online check the 1.7% figure popped up, but I do not believe that it could be that low.

The problem is the large State Owned Enterprises owe the state Banks enormous sums on projects that are not generating sufficient cash flow to service the debt. For political reasons it has not been possible for these projects to be declared to be NPL's. These loans are called "Special Mention Loans" and fall into a different class to NPL's. PWC has the totals for NPL's & SML's at 5.5%

In reply to by SMD

Ghost who Walks MAGA Thu, 07/05/2018 - 01:41 Permalink

https://www.hongkongfp.com/2017/04/30/non-performing-loans-capital-outflow-china-verge-banking-crisis/

This link suggests that risky corporate loans might be 7% of GDP. There is some more commentary, but no clear-cut percentage provided.

This from PWC suggests based on some good research that the figure is really 5.5% allowing for the addition of "Special Mention Loans"

https://www.pwccn.com/en/research-and-insights/china-s-ballooning-debt.html

Later in the PWC piece it suggested that bad loans as a % of total loan book may have reached 15% to 20% at which level if they were recognised as NPL's that bank's capital bases would be wiped out. That should be a clue that the reported figures will be well below a level that calls into question the stability of the banks. As Jean Claude Juncker said "When it becomes serious, you have to lie."

In reply to by MAGA

sun1616 Wed, 07/04/2018 - 20:57 Permalink

Run RUN Zero-hedge community, the world is coming to END ,,,,,,since 2009 ,,,,,,when was last time  Zero-hedge posted positive article ??? some companies like Amazon, Facebook, Apple, Tesla has added Trillion dollar valuation but Zero-hedge poster thinks world is coming to end and missed the boat. Millions of people's life are improving in Asia and Africa due to internet, power etc  but here you will find nothing but negativism on everything.

MrNoItAll sun1616 Wed, 07/04/2018 - 21:39 Permalink

When the end of human civilization as we know it is hanging by a thread, supported only by massive unpayable debt combined with lies and financial manipulation on a scale unparalleled in history, you're looking for good news? Watch CNN. Stick your head in the sand. Take a happy pill. The good news is irrelevant and often just lies anyway. Big boys can deal with the harsh truth. But not you apparently.

In reply to by sun1616

sun1616 MrNoItAll Wed, 07/04/2018 - 21:44 Permalink

Dude who knows how much lie was spread when there was no printing press, internet, TV . The real truth is millions of people life are getting better, today you have more facility than ancient king used to have still you have unlimited complaints. Your life is much better then your parents, today people work load is very little compared to 100 years ago. Main problem is people don't know what to do with their free time, how to use it, future technology will make life even more comfortable. Even if you get a person who is getting free food, housing, living expenses he still has hundreds of complaints ,,, Million died in the past just from hunger and disease which is the least worry today.

In reply to by MrNoItAll

Red Fred sun1616 Thu, 07/05/2018 - 04:01 Permalink

If everything is so good, why are millions of people fleeing Africa, the Middle East and elsewhere? I will not even go into the number of people killed by war in the ME. Do you think any of these war torn countries have safe running water, electricity, medical care or food security? 

 

You cannot cure stupid.

In reply to by sun1616

konadog Wed, 07/04/2018 - 21:09 Permalink

Meanwhile, US companies can't outsource American jobs to this culture of corruption and lethargy fast enough. But, but, but, they work cheaper... Uh huh, as long as you don't mind having your company robbed blind by assholes who will do almost anything to avoid actual work.

galant Wed, 07/04/2018 - 21:37 Permalink

Just the stuff you'd expect to read about a country that prefers a Russian S-400 defense system. 

Next up, justification for more moronic sanctions.

sun1616 g3h Wed, 07/04/2018 - 22:15 Permalink

Run RUN Zero-hedge community, the world is coming to END ,,,,,,since 2009 ,,,,,,when was last time  Zero-hedge posted positive article ??? some companies like Amazon, Facebook, Apple, Tesla has added Trillion dollar valuation but Zero-hedge poster thinks world is coming to end and missed the boat. Millions of people's life are improving in Asia and Africa due to internet, power etc  but here you will find nothing but negativism on everything.

In reply to by g3h

TeraByte Thu, 07/05/2018 - 00:49 Permalink

These will turn up to the market as AAA collateral judging to a longstanding practice. Nobody will a loser by investing in such high yielding sound securities.

Ghost who Walks Thu, 07/05/2018 - 02:00 Permalink

Having had a quick scan on the internet I find it amazing that key financial data on the Indian and Chinese economies is either not readily available or not credible due to the range of reported data.