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High NPAs in Indian Banking system - A potent risk for the Economy
May 4, 2016

Yesterday, we wrote about the rising disconnect between asset quality and GDP growth. While there is still lot of scepticism on GDP figures, deteriorating asset quality is something we all are aware of and agree on.

Here is yet another indicator of how bad the NPA crisis is for the Indian economy.

Poor credit appraisal, over leveraging, the practice of giving fresh loans to pay off old ones, and leaving the mess for the successor to clear up are some of the practices that are prevalent in the public banking system. And these inefficiencies have made Indian banks most vulnerable compared to other Asian countries. As shown in the chart, the Indian banking sector's NPAs are the highest among its Asian peers.Regulatory mechanisms that have worked well in other countries, have their limits in the Indian context. Undoubtedly, the models of other countries are not easy to replicate in view of different geographic, social and economic characteristics in the country. India's policy framework is a combination of socialistic and capitalistic features with a high bias towards public sector investment. Having said that, the NPA crisis cannot be ignored and it's high time that policymakers deal with the rot in India's banking sector. No economy can be strong unless it enjoys the support of a strong and healthy banking system. Unless the root causes of NPAs or bad debt are forcefully dealt with, the banking sector and Indian economy will get progressively vulnerable.

Note: Data for China is taken for 2QCY15, for Korea 2QCY14 and for Australia 3QCY15

This Chart Of The Day was published in The 5 Minute WrapUp - Is Your Fund Manager Earning Too Much?

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