India and neighbouring countries are growing at a decent pace while the developed world is struggling to maintain its economic impetus. But these countries need reform-minded global financial institutions to further boost their growth
India has warned about the risks of low and negative interest rates and “significant loan impairments” in the world banking system. It affects financial stability across the globe. Union Minister for Finance Arun Jaitley, addressing the recent annual meeting of the World Bank (WB) and the International Monetary Fund (IMF), said disorderly de-leveraging of private debt could also impact growth. He stressed that risks to financial stability persist because of low and negative interest rates and loan impairments in the banking system.
The statement is profound. He also called for an early IMF quota review and recapitalisation of the World Bank to enhance funding for pro-poor programmes. It hits the emerging markets, India stressed. India itself is suffering because of reform delays in various international financing agencies. During the last fiscal, fresh commitments delivered were only $3.8 billion, as against the requirement of five billion to seven billion dollars. The IMF and the WB need to be more agile and less expensive so that poor nations can enhance global growth. However, both have put the reforms off to 2019 instead of meeting the scheduled year of 2016.
A significant aspect of the world economy is that India is doing much better even with low soft funding by the IMF-WB. Its growth remains around 7.6 per cent. In fact, growth in the subcontinent averages better than the rest of the world — with Bangladesh at 6.3 per cent, Sri lanka at about 5.3 per cent and Bhutan at 6.8 per cent. With better funding by the international institutions, these nations could lead world growth.
Most other emerging economies are doing better though the pace remains uneven. This calls for enlarging the lending programme of financing agencies. But domination by the West and concerns about the large economies have withheld the reforms.
The growth of India and its subcontinental neighbours shows that regional variations are possible with better policy initiatives. But in a globalised world, these have risks,particularly as the isolationist approach increases — as is seen during the US presidential campaign. Brexit and trends in Europe also suggest that isolationism is gaining ground in developed countries.
So, the expansion of groups like Shanghai Cooperation Council, Brics (Brazil, Russia, India, China and South Africa, The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (Bimstec) involving a group of countries in South Asia and Southeast Asia, may be the futuristic solution. Bimstec includes Bangladesh, India, Myanmar, Sri lanka, Thailand, Bhutan and Nepal.
As the Pacific groupings and Association of Southeast Asian Nations (Asean) strengthen, the world may see a shift gradually. This may, however, take time. let us accept the fact that the globe is presently being stirred by the Western nations. Their banking system hits the world. A sneeze in their system in 2008, largely due to low and negative interest rates, reckless grant of loans led to the collapse of their banking system, which spread beyond a few established names.
It has also exposed that, despite not-so-close banking links, India suffered the post-2008 crisis, though it managed to stave off a disaster.
Countries like India also have to be careful about the sermons that they give to the world. India’s banking system remains fragile. Indian banks are capitalised by the poor and salaried depositors. An upheaval in the system could have severe repercussions on the programmes of the Government. As more and more poor are being made to join it, and Government subsidies are channelled through the banks, India has to take steps to strengthen the system.
The banks are run with the poor man’s money. low interest rates, large corporate funding, and certain bank practices like asset quality review (AQR) — loan restructuring — have resulted in a sharp surge in bad debts, though technically these may not be non-performing assets (NPAs).
Gross bad loans of commercial banks could increase to 8.5 per cent of total advances by March 2017; from 7.6 per cent in March 2016, according to the latest RBI Financial Stability Report. The report says, “If the macro situation deteriorates in the future, the gross NPA ratio may increase further to 9.3 per cent by March 2017.”
The resultant sharp surge in provisions for bad debts has eroded profitability, especially at state-owned banks, in recent quarters. The gross bad loans of public sector banks increased to 9.6 per cent as of March 2016, from about six per cent a year earlier, according to RBI data.
There was an almost 80 per cent jump in gross bad loans in 2015-16, according to the report. Gross bad loans of Indian banks widened to 7.6 per cent from 5.1 per cent in September, and from 4.6 per cent in March 2015. In 2004, gross bad loans in the Indian banking sector touched 7.8 per cent, while the ratio was 11.1 per cent in 2002. The stress in the banking sector mirrors the stress in the corporate sector, the RBI report observed.
The Reserve Bank of India said that, subsequent to the AQR, loan restructuring, gross NPAs rose 79.7 per cent year-on-year in March 2016.
It has also observed that the relief the RBI was giving in repo rates — interest rates — to banks was not being transferred to the lenders. Instead, depositors were suffering interest rate cuts — a double whammy. It is evident that banks are trying to cover up their losses at the cost of their depositors.
The country’s credit growth has also suffered. This indicates that in future, the banks’ earnings may be hit. low credit growth means the banks would earn less from lending. It is a kind of warning for the depositors. The depositors may suffer a further cut in their interest earnings in the days to come.
The RBI’s monthly credit growth data since June 2013 shows that the year-on-year credit growth for the sector has come down sharply — from a high of 19.1 per cent in June 2013 to 8.4 per cent in December 2015. It hit a low of 8.2 per cent in August 2015.
loans by public sector banks grew at four per cent while it was 24.6 per cent for private banks. Deposits of state-run banks grew by 5.2 per cent, while for private banks, it was 17.3 per cent.
India has to learn from its recent mistakes as well as from what it is telling the world. lenders have easy ways to default, but the depositors’ principal amounts are at risk. India has to fix the minimum deposit rates, which should be at nine per cent. This would help depositors, decide floor lending rates and be a saviour for the struggling banks.
(The writer is a senior journalist)