RBI warns of reversal in India’s bad-loan clean up

Bloomberg

India’s financial regulator predicted that an improvement in banks’ bad-loan ratios will reverse, as a slowing economy hurts borrowers’ ability to repay.
In its latest Financial Stability Report, the Reserve Bank of India said soured debt at Indian lenders will rise to 9.9% of total credit by September 2020, after dropping the most in 15 years to 9.3% a year earlier. It had previously forecast 9% in March.
“This is primarily due to change in macroeconomic scenario, marginal increase in slippages and the denominator effect of declining credit growth,” the RBI said.
State-run banks need to boost buffers against disproportionate operational risk losses and private-sector lenders must improve corporate governance, Governor Shaktikanta Das wrote in a foreword to the report.
Gross bad loans at shadow banks also increased to 6.3% in September from 6.1% in March.
The authority, however, said the risk of contagion has eased from March, a time when any failure among the largest of the non-bank finance firms could have caused losses comparable to a collapse among the major banks.
The RBI’s assessment contrasts with warnings from Moody’s Investors Service and S&P Global Ratings, which see rising risks of contagion in the Indian financial sector amid a persisting cash crunch. The credit quality of Indian companies has plummeted to a record as Prime Minister Narendra Modi’s government struggles to revive economic growth from a six-year-low.

More than a year after a series of defaults by Infrastructure Leasing & Financial Services Ltd. forced the government to intervene and exposed weaknesses in the nation’s shadow banks, the sector is entering a new phase. In November, the RBI seized control of Dewan Housing Finance Corp., another troubled shadow lender, and said it would initiate bankruptcy proceedings against the firm.