Will India’s government act to save its public-sector banks? | The Economist

Will India's government act to save its public-sector banks?

Few options are palatable to both the government and investors

CRIPPLED BY YEARS of mismanagement, much of India's financial system was poorly positioned even before the turmoil of covid-19. S&P, a rating agency, reckons that non-performing assets as a share of loans came close to double digits in 2019-a much higher rate than other big emerging markets, except for Russia (see chart 1). The government's own straitened finances meant that there was little scope for aid when the crisis struck. Instead, it put off a reckoning while minimising upfront costs. A moratorium that was in place until August let borrowers skip payments and banks pretend they were being paid; another provision allowed loans that would otherwise be placed in default to be restructured.

Banks' earnings for the final quarter of 2020, which are starting to be released, contain hints of what unfolded after the moratorium ended. Earnings reports from the successful private-sector banks, notably HDFC and Kotak Mahindra, showed tolerable credit losses and strong deposit growth, as perceptions of their strength instilled confidence in customers. The public banks continue to show far higher levels of non-performing loans-and a temporary stay imposed by India's Supreme Court on classifying borrowers in default means that these are likely to be understated. There are reasons to think that these problems cannot be ignored for much longer.

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