Rising bad debts posing a threat to Indian banking industry

THE banking system in India faces a crisis as bad debts rise to unacceptable levels. Leading the pack of defaulters are large companies mainly in the infrastructure, steel and aviation sector. The origins of the default lay in the boom period of 2003 to 2008 when companies invested heavily in priority sectors with cheap money. As the economy slowed in 2012, they found it difficult to repay bank loans and even the interest on them.

Banking indicators are not healthy. The financial stability report released by the Reserve Bank of India in mid-December presents a sombre picture. According to the report, banks' bad loans grew to 5.1 per cent (from 4.6 per cent) of gross advances in the six months between March and September 2015, while "stressed advances" (or restructured loans) increased to 11.3 per cent (from 11.1 per cent) over the same period.

This is much above safe levels, especially as most of the bad loans or stressed assets are from the public sector banks. The bad debts (non-performing advances or NPAs) are expected to go up further, and if economic conditions deteriorate, could rise to 6.9 per cent by March 2017 "under a severe stress scenario".