Deteriorating Asset Quality in India and China

01
Fending off Toxic Debt -
A Closer Look at the Two Asian Giants’ Deteriorating Asset Quality
Dushanthi Silva, Sri Lanka Analyst Team
The banking industries in India and China are challenged by growing asset
quality concerns amidst a rise in the volume of bad loans worth billions of
dollars to politically allied and heavily debt-ridden borrowers, who are now in
trouble. Consequently, non-performing assets (NPAs) in public banks have
sharply increased, with aggregate banking system capital nearing regulatory
minimums. The deteriorating financial health of banks has in turn increased the
systemic risk of the sector, threatening the stability of the banking system.
Indian authorities have stepped in aggressively, compelling lenders to recognize
the full extent of bad loans and clean-up their books, while supporting the
banking system through a series of capital infusions. Our analysis, suggests that
the Indian banking system will continue to remain resilient unless NPAs more
than double their reported levels.
However, counterparts in China, faced with a similar dilemma, seem to still be
ignoring the full extent of the problem. Given the banking system’s importance
to the global economy, a stronger response by the government is warranted
despite the ability of the economic powerhouse to withstand the reported
deterioration in asset quality.
A Closer Look at the Two Asian Giants’
Deteriorating Asset Quality
20160928

02
Accommodative Monetary Policy - a Prominent Theme in
India and China
The Indian banking sector plays a pivotal role in the equitable distribution of
credit in the country’s economic development. As per the Reserve Bank of
India (RBI), the banking sector is adequately capitalised and well-regulated,
which was reflected in it being resilient even during the global downturn in
2008. As of 2015, the country’s banking system was valued at USD 1.9 trillion
(in terms of assets) (90% of GDP), and ranks as the fifth largest in the Asia
Pacific. However, the sector contributed a mere 1% of global banking assets in
comparison to China - which accounted for nearly 20% of global banking assets
as of 2015.
The Reserve Bank of India (RBI) has adopted an accommodative monetary
policy stance since 2013, with the RBI easing or delaying tightening. The
monetary easing came with a deceleration of inflation (to 5.9% in 2015 from
9.3% in 2012) on the back of a sharp drop in oil prices and softening
commodity prices, strong economic growth (GDP growth increased to 7.6% in
2015 from 5.6% in 2012) and an improved fiscal situation (fiscal deficit reduced
to 4.1% of GDP in 2015 from 5.7% in 2012). The debt fueled stimulus was
aimed at accelerating a trickle-down effect through the Indian economy by
making more cash available at a lower interest rate. Since January 2013, the
RBI has cut interest rates by 150 basis points (bps) to 6.5% in 2016 from 8.0% in
2013. Further, as part of liquidity enhancement initiatives, the cash-reserve
ratio was lowered to 4.0% in 2013 from 5.5% in 2012, with the rate on the
marginal standing facility reduced by 250 bps (in several steps) to 7.0% in 2016
from 9.5% in 2013.

03
Source: World Bank national accounts data, and OECD National Accounts data files, RBI
Note: 2016 (E) GDP growth rate is based on the IMF forecast; however, the lending interest rate and deposit interest rate are
actual figures
Source: RBI
Similarly, China, the largest banking system in Asia Pacific, adopted an
expansionary monetary policy stance for a prolonged period since 2008, in a
bid to defy any external shocks in the aftermath of the global financial crisis
(GFC). Accordingly, interest rates which stood at 5.3% as of 2008 reached a
record low of 4.3% as of 2015.
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (E)
Benchmark Repo Rate Maintained at a Five-Year Low of 6.5%
GDP Growth Rate Lending Interest Rate Deposit Interest Rate
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
RepoRate
Date of Change
150 bps cut in Repo Rate by the RBI over the Last 18-Months

04
Source: World Bank national accounts data, and OECD National Accounts data files
Top 15 Asia-Pacific Countries by Total Banking Assets
Rank Country
Asset Base as of 2015
(USD trillion)
As a Percentage of
Global Banking Assets as
of 2015
1 China 34.0 20.2%
2 Japan 8.2 4.9%
3 Australia 3.0 1.8%
4 Hong Kong 2.4 1.4%
5 India 1.9 1.1%
6 Malaysia 1.5 0.9%
7 Taiwan 1.4 0.8%
8 Singapore 0.8 0.5%
9 Thailand 0.5 0.3%
10 Indonesia 0.4 0.2%
11 New Zealand 0.3 0.2%
12 Vietnam 0.3 0.2%
13 Philippines 0.2 0.1%
14 Pakistan 0.1 0.1%
15 South Korea 0.1 0.1%
Source: BMI Research, UZABASE
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
China Lowers the Benchmark Lending Rate to Revive Economy Post Financial
Crisis
GDP Growth Rate Lending Interest Rate Deposit Interest Rate

05
Despite Monetary Stimulus, Credit Off-take in India
Continues on a Downward Spiral
Regardless of policy rates continuing to be well below historical norms, Indian
banking sector credit growth has slowed since 2012 to a CAGR of 13.3% during
2012-15. This displays a significant deceleration compared to the credit growth
CAGR of 23.2% during 2006-11, largely owing to demand and supply-side
constraints. On the demand side, key sectors such as infrastructure (35% of
bank credit in March 2016), demonstrated less credit-intensive growth due to a
high number of stalled projects. Accordingly, credit off-take growth in the infra
sector slowed to a record low of 4.4% YoY in March 2016 from 37.2% YoY in
March 2011. Similarly, the power sector - the biggest drawer of bank credit
within infra, recorded the sharpest deceleration in credit growth to 4.0% YoY in
March 2016 - a fall from 41.9% in March 2011. Further, a large portion of the
decline was also attributed to moderating credit aggregates, thereby
constraining supply in the wake of banking sector risk aversion.
Source: RBI, Source: World Bank national accounts data, and OECD National Accounts data files
0%
5%
10%
15%
20%
25%
30%
35%
0
10
20
30
40
50
60
70
80
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
YoYGrowth
INRbillion
Credit Off-take Growth Slowed to 9.7% YoY in 2015- a Fall from 18.1% in 2012
Loans and Advances Lending Interest Rate Loans and Advances Growth

06
Source: RBI, Planning Commission- Government of India, Ministry of Statistics and Programme Implementation
Source: RBI
In contrast, China saw a rapid expansion of bank credit owing to a prolonged
expansionary monetary policy by the People’s Bank of China (PBOC), with
banks being compelled to boost credit to state owned enterprises (SOEs) and
local governments for major infrastructure developments. Accordingly, on the
back of a healthy credit growth CAGR of 17.5% since the global financial crisis
(during 2008 -15), banking sector tripled to USD 34 trillion against a GDP of
USD 10 trillion (340% of GDP).
0%
5%
10%
15%
20%
25%
30%
0
20
40
60
80
100
120
140
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
YoYGrowth
INRbillion
Banking Sector Asset Growth Slows Mirroring Credit Growth
Aggregate Banking Assets Asset Base Growth
0%
5%
10%
15%
20%
25%
30%
Infrastructure Power Roads
CreditGrowthYoY
Decelerating Credit Growth in Infrastructure Sector
As of March 2012 As of March 2013 As of March 2014 As of March 2015 As of March 2016

07
Upsurge in Banking Sector Assets in China Amidst an Expansionary Policy
Source: IMF, CEIC, UBS Estimates, SNL Financial, People’s Bank of China,
China Banking Regulatory Commission Annual Report 2013
Note: Assets data include consolidated assets of banking institutions within and outside China
Rising Non-Performing Assets in Public Banks Resulting in
Stricter Credit Control
Seasoning of the loan book amidst a credit cycle of rapid expansion (in 2006-
11) led to a credit deadlock as a result of less stringent credit appraisals and
competitive credit disbursals. Consequently, the gross non-performing assets
(NPAs) in the Indian banking system rose at a CAGR of 30.8% during 2010-15 -
significantly above the credit growth CAGR of 16.1% recorded for the same
period. Accordingly, NPA as a proportion of total advances increased to 4.3% in
2015 from 2.5% in 2010, while further deteriorating to 7.6% in March 2016. As
a result of the weakening performance, the Indian bank shares became the
worst performing shares in Asia (ex-Japan), over the past year with 11 banks
reporting losses for the quarter ended-December 2015.
Moreover, the RBI expects gross NPA to worsen to 8.5% by March 2017 under
its baseline stress test scenario. Furthermore, according to the RBI financial
stability report June 2016, given the most adverse conditions, the gross NPA
ratio may further worsen to 9.3% by March 2017, hampering the banking
sector’s overall performance.
0%
5%
10%
15%
20%
25%
30%
35%
0.0
50.0
100.0
150.0
200.0
250.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
YoYGrowth
CNYtrillion
Aggregate Banking Assets Asset Base Growth Credit Growth

08
Ballooning Non-Performing Loans Curtail Credit Growth
Source: RBI
Public Sector Banks Record Low and Declining Returns
Source: RBI
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
2010 2011 2012 2013 2014 2015
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
NPARatio(%)
YoYGrowth(%)
NPA Ratio Loans and Advances Growth Gross NPA Growth
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
Foreign
Banks
Private
Sector
Banks
Public
Sector
Banks
All SCBs
ReturnonAssets(ROA)
2013 2014 2015
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
Foreign
Banks
Private
Sector
Banks
Public
Sector
Banks
All SCBs
ReturnonEquity(ROE)
2013 2014 2015

09
Majority of NPAs Reside on the Balance Sheets of State-
Owned Banks under the Weight of Politically Driven
Decision-Making
Public sector banks, which account for 70% of the Indian banking system have
performed the worst since 2012, with stressed advances (the combination of
restructured standard advances and non-performing loans) clocking in at 13.5%
in 2015, compared to 4.6% in private banks. Moreover, public banks’ gross NPA
ratio registered at 5.4%, compared to the industry average of 4.3% in 2015,
while rising to 9.3% of total advances in March 2016. The RBI further estimates
that this ratio may worsen to 10.1% by March 2017. Moreover, according to a
report by Credit Suisse, at state-owned banks, the un-provided NPAs are now
at 30%–75% of their capital and un-provided problem loans (loans which are in
trouble and could turn into NPAs) are at an even higher level of 65%–200%.
Sectors including power and iron & steel formed a large part of the stressed
assets, predominantly on the back of an overestimated demand and supply
position (industry overcapacities), inflated project costs and poor project
appraisals. The iron & steel sector, which accounted for a major part of the
stressed loans was severely impacted due to sluggish offtake by Indian
consumers and intense competition stemming from the Chinese market.
Further, sectors such as infrastructure and engineering procurement &
construction (EPC) were saddled with various issues, thereby delaying
execution while challenging their economic feasibility. On a related note, lack
of funding channels for local government in the absence of a deep corporate
bond market and muted participation by pension funds negatively impacted
the country’s banking system while aggravating the crowding out of lending to
small businesses.

10
Asset Quality of Public Sector Banks Deteriorates; Private Sector and Foreign Banks Intact
Source: RBI
Power, Iron and Steel Accounted for a Quarter of Stressed Assets
Source: RBI
Similarly, the Asian major – China, is also exposed to an exceptionally large low
quality credit market as the banks were compelled to boost credit to SOEs,
following the global financial crisis. The Chinese banking system is faced with
the legacy of state utilisation of bank credit for financing the operations of
SOEs regardless of their profitability or risk. Moreover, supported by an ultra-
low interest rate regime, major infrastructure developments such as roads,
energy plants and rail systems were completed. The boom in investments has
however led to overcapacity in many capital intensive sectors such as steel,
cement and mining. Meanwhile, since 2009 shadow banking activities in the
Chinese banking system increased with top banks increasing their exposure in
the property sector making them more vulnerable to a property downturn.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2011 2012 2013 2014 2015
GrossNPARatio
Public Sector Banks Foreign Banks Private Sector Banks
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Power
Generation
Iron & Steel Textiles Aviation Telecom Mining
Percentage
(asofMarch2015)
Share in Advances Share in Stressed Advances

11
The slowdown in economic growth spelt trouble for the banking system with
revenues of borrowers now coming under pressure. Accordingly, the reported
NPA ratio at China’s banks increased to 1.7% in 2015 from 1.3% in 2014, and
further to 2.2% as of May 2016. Alongside the NPAs, in China there is another
category of “Special Mention Loans” (loans with which borrowers are
experiencing difficulties and which may threaten the financial institution's
position) totaling CNY 3.2 trillion as of 1Q 2016. When these are taken into
consideration, the market estimates of the true NPA position reaches an
alarmingly high of 15-19% of the loan book, as per the assessment by the
brokerage CLSA. This definitely indicates a red flag.
As of end-2015, Just 1.7% of Chinese Loans Were Officially Classified as NPA
Source: CBRC
NPA and Special Mention Loans Trending Upwards
Source: CBRC, PwC Analysis
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2010 2011 2012 2013 2014 2015
YoYGrowth(%)
NPARatio(%)
NPA Ratio Loans and Advances Growth Gross NPA Growth
0.8 trn
1.2%
2.1 trn
3.1%
1.2 trn
1.6%
2.8 trn
3.8%
NPA Special Mention Loans
RMBtrillion(%ofloans)
Dec-14 Sep-15

12

13
In China the build-up of bad debt has continued for 18 consecutive quarters
exerting tremendous pressure on the banking system. The majority of bad
loans are stemming from China's Big four state-owned banks - Industrial and
Commercial Bank of China - the world's biggest lender by assets (accounting for
2.1% of global assets as of June 2016), China Construction Bank (accounting for
2% of global banking assets as of June 2016), Agricultural Bank of China and
Bank of China - where each bank saw a nearly 100 bps increase in their NPA
ratio as of June 2016 compared to the previous year. Moreover, on the back of
souring bad loans, the loan loss provisions of the largest Chinese banks have
diminished over the years, while these banks are now faced with a dilemma
between breaching the 150% provisioning requirement or reporting a profit
decline.
Shrinking Buffers in Chinese Big Banks Continue in 1Q 2016
Source: The Wall Street Journal
0%
50%
100%
150%
200%
250%
300%
350%
400%
2011 2012 2013 2014 2015 Mar-16
LoanLossProvision(%)
Industrial and Commercial and of China Agricultural Bank of China Bank of China
Regulatory Minimum 150%

14
Deliberate Non-Payment, a Common Scenario in Both
Nations
According to the Credit Information Bureau (India) Limited (CIBIL), there were
6,819 willful defaulters in India owing INR 750 billion as of December 2015. This
figure registered 51% growth since 2012 compared to INR 220 billion from
3,703 willful defaulters until December 2012. (The RBI defines willful default as
deliberate non-payment of dues by the borrower despite adequate cash flow
and good net worth). Although the banks have filed lawsuits against the top
willful defaulters, the enforcement of law remains questionable with significant
delays due to corruption and political influence.
Another major limitation is the classification of these borrowers where the
banks do not adopt a uniform policy when declaring a borrower as a willful
defaulter. For instance, Kingfisher Airlines which owes an aggregate INR 69.6
billion to banks (2.2% of aggregate banking sector NPA), has been declared a
willful defaulter only by the State Bank of India (SBI) and Punjab National Bank
(PNB), with most other banks yet to adopt the classification. Similarly, in China
a number of state-owned enterprises such as Bohai Steel have historically used
their political connections to coordinate with creditors, while delaying debt
servicing and extending repayments. Consequently, these structural
shortcomings have left behind mountains of bad debt, threatening the stability
of the banking system.

15
Top Wilful Defaulters in India (As of December 2015)
Company INR billion
As a % of Aggregate
Banking Sector NPA in 2015
1. Winsome Diamonds Forever Precious Group 39.7 1.2%
2. Zoom Developers 19.1 0.6%
3. Kingfisher Airlines
(Out of INR 69.6 billion only INR 18.0 has been declared as willful default)
18.0 0.6%
4. S Kumars-Reid & Taylor 17.9 0.6%
5. Pearl-Pixion Group Companies 12.3 0.4%
6. Deccan Chronicle 9.9 0.3%
7. Beta Naphthol 9.5 0.3%
8. XL Energy 6.5 0.2%
9. Teledata GroupCompanies 5.8 0.2%
10. JB Diamonds 4.7 0.1%
11. Vindhyavasini Steel Group COS 4.6 0.1%
12. Zylog Systems 4.4 0.1%
13. REI Agro 3.1 0.1%
14. Indian Technomac 3.0 0.1%
15. Panther Fincap (Ketak Parekh) 2.3 0.1%
Source: CIBIL

16

17
Banks Bite the Bullet - Write off Bad Loans, Taking a Hit on
Solvency
In line with the mounting bad loans, write-offs by banks surged at a CAGR of
44.1% during 2012-15, with public sector banks having written-off loans
totaling INR 1,140 billion at a CAGR of 50.7%. The regulator hoped that the
banks would find a way out of the problem, and hence did not intervene to
address the toxic loan problem until the recent past. However, in line with the
continually worsening asset quality and the consequential waive-off of
defaulted loans, the RBI conducted an asset quality review (AQR) across the
entire banking system (broadly similar to a stress test) in October 2015, to
clean up the balance sheets of those troubled institutions. The RBI
observations were encouraged to proactively and conservatively look at the
troubled accounts and emphasised the recognition of restructured assets as
NPAs while creating adequate provisions to cover restructured loans.
Accordingly, fiscal 2015 alone witnessed a steep 55.3% YoY surge in write-offs
as part of the balance sheet clean-up.
Capitalisation ratios of the banking sector slipped to 12.9% in 2015 from 13.0%
in 2014 (the RBI stipulates a Minimum Total Capital to Risk Weighted Assets
Ratio (CRAR) of 9% for India – higher than the BASEL III requirement of 8%).
Public sector banks continued to report the lowest Capital to Risk Weighted
Assets Ratio (CRAR) at approximately 12%, whereas private sector banks’
(PVBs’) CRAR reached 16% as of 2015. The RBI also announced a March 2017
deadline for banks to clean-up their balance sheets, due to the high incidence
of bad assets. Accordingly, following the clean-up and the planned capital
infusion of INR 250 billion by the government, the capitalization ratios of the
banking sector may hover in the range of 11.0%-11.5%, with CRAR of public
sector banks further moderating to 9% - on par with the regulatory minimum.
In the absence of a capital infusion in 2016 and 2017, CRAR would be 0.5%
lower. Under various NPA scenarios, it could be seen that CRAR would drop
below the regulatory requirement in the event actual NPAs reach 9-10%
compared to the current 4.3% level in 2016.
Impact on Banking Sector Capital (as of 2015) Given Various NPA Scenarios
Projected NPA 6% 8% 10%
CRAR 9.5%-10.0%
9.0%-9.5%
(Regulatory Minimum)
8.5%-9.0%
(Basel II Recommendations)
Source: UZABASE

18
“We believe enough capital is available. While the profitability of some banks
may be impaired in the short run, the system, once cleaned, will be able to
support economic growth in a sustainable and profitable way,” - Former RBI
Governor Raghuram Rajan
"As of now, the public sector banks are adequately capitalised and meeting all
the Basel III and RBI norms. However, the government wants to adequately
capitalise all the banks to keep a safe buffer over and above the minimum
norms of Basel III. We have estimated how much capital will be required this
year and in the next three years till financial year 2019," - Ministry of Finance
Indian Bank CRARs Moderate from Strain of Bad Debt Write-Offs
Source: RBI
12.4%
12.6%
12.8%
13.0%
13.2%
13.4%
13.6%
13.8%
14.0%
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
2013 2014 2015
CRARRatio
INRmillion
Write-offs CRAR

19
RBI Intervention in terms of the AQR followed a Number of Pre-Operative Procedures
Other Government Intervention to address the Worsening Asset Quality in the Banking System
 Creation of the Central Repository of Information on Large Credits (CRILC) database, which facilitates the compilation
of information on levels of indebtedness of various groups in the financial system
 Issuance of detailed guidelines on a framework to revive the distressed assets in the economy in order to improve the
system’s ability to deal with corporate and financial distress
 Introduced detailed guidelines on the formation of a Joint Lenders’ Forum (JLF), corrective action plan (CAP),
‘refinancing of project loans’, ‘sale of NPAs by banks
 Introduced 5/25 scheme and the Strategic Debt Restructuring scheme with the aim of controlling the stress levels in
the sector
 The Bankruptcy Code, passed by the Parliament during the Budget session in 2016, is due to become operational
thereby facilitating faster recovery of loans by banks
 Proposed Debt amendments to the Recovery Tribunal Act and SARFAESI Act (Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act) further empowering banks legally
 Capital infusions to bolster the capital adequacy ratios of the weak public sector banks to match the capital buffer levels
as prescribed by the Basel III norms
According to the capital infusion road map, public sector banks would receive INR 250 billion in 2016-17, and INR 100
billion each in 2017-18 and 2018-19
Source: The Indian Express, UZABASE
Government Infuses Capital to Strengthen Solvency
Source: Government of India
0
50
100
150
200
250
300
2013 2014 2015 2016 2017
INRbillion
Announced in Budget Actual

20
Allocation Break-up of INR 250 billion Capital Infusion
Bank Amount (INR million) As a % of the total Allocation
State Bank of India 75,750 33.1%
Indian Overseas Bank 31,010 13.5%
Punjab National Bank 28,160 12.3%
Bank of India 17,840 7.8%
Central Bank of India 17,290 7.5%
Syndicate Bank 10,340 4.5%
UCO Bank 10,330 4.5%
Canara Bank 9,970 4.4%
United Bank of India 8,100 3.5%
Union Bank of India 7,210 3.1%
Corporation Bank 6,770 3.0%
Dena Bank 5,940 2.6%
Allahabad Bank 440 0.2%
Total 229,150 -
Source: Ministry of Finance
Similarly, in China banks have written off more than USD 300 billion of bad
loans in the past 3 years-compared a mere USD 1.8 billion worth of bad debt
write-offs in India, in order to reassure investor confidence that the country
can cope with its mounting NPA.
What China can Learn from India’s Bold Approach - An
Example from the Asian Neighbour
Though the cleanup is still underway, India has become the front runner in
addressing asset quality concerns which has scored some early success by
taking prudential measures. Banks have now expedited the process of
recovering bad loans from overextended tycoons like Mallya. In contrast,
China, seems to still ignore the full extent of the problem. Even though Chinese
banks have continually reported mounting bad debts, banks have still not
curtailed lending. According to the PBOC, new loans worth USD 718 billion
were disbursed in the first quarter of FY 2017-a threefold increase compared to
the same period last year.

21
Unlike India, given the systematic importance of China’s banking system to the
world- considering its asset size, an NPA ratio of 10% would equal USD 3.4
trillion (34% of Chinese GDP) or 5% of world GDP. Further, this is even greater
than the Indian GDP which is approximately USD 2.1 trillion as of 2015. This
would exacerbate the need for proactive measures to address the potential
loss, before the debt bomb leads to a crisis. Furthermore, according to the
Bank of International Settlements, the corporates collectively owed USD 17.4
trillion as of September 2015 (177% of the Chinese GDP), which is staggering
compared to the much lower USD 985 billion in India (50% of the Indian GDP).
A bank with a cleaner balance sheet always looks more promising, as it
indicates a stronger position to direct credit for economic development.
Therefore, the biggest lesson that China can learn from India is the prudential
recognition of bad loans without delaying their recognition by ways of
restructuring, thereby, challenging the credibility of the reported figures.
Additionally, the Chinese cabinet discussions regarding lowering the loan-loss
provision ratio to 120-130% from its current level of 150% - a move to report
larger profits in the banking system, raises a crucial question on the direction of
the reforms. The earlier ratio was set when the asset quality was better than
current levels, therefore lowering it further and making more funds available in
a flagged economy may worsen the current scenario.
“You can put lipstick on a pig, but it doesn’t become a princess, so dressing up a
loan and showing it as restructured, and not provisioning for it when it stops
paying, is an issue. Anything which postpones a problem rather than
recognizing it is to be avoided.” -RBI Governor Raghuram Rajan
The world’s second largest economy is still in a stronger position to tackle the
problem as they have more financial capacity. The country’s sovereign debt to
GDP of 43.5% as of 2015, compared stronger than the 66.8% in India, indicating
the Chinese government’s stronger position in funding capital injections to turn
around the weary banking sector. Further, due to the higher savings rate in the
country, the Chinese banks are still enjoying ample liquidity - an essential
component for banks’ stability. These combined factors may lead to a slower
recognition of NPAs, and might inaccurately indicate a lower need for a large
bailout in the immediate future.
Will China muddle through? The question remains………

22
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