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A cashier checks Indian rupee notes inside a room at a fuel station in Ahmedabad, India, September 20, 2018. REUTERS/Amit Dave/Files

CEA says lenders should be watchful of asset quality

  • Of the 100 top global banks, 18 are Chinese and yet the fifth largest economy in the world has only one bank in the global top 100 – State Bank of India, Subramanian said

MUMBAI: Indian lenders must be watchful of who they lend to, given that “zombie lending" was witnessed during the last round of forbearance in 2008-2009, said chief economic adviser (CEA) KV Subramanian.

MUMBAI: Indian lenders must be watchful of who they lend to, given that “zombie lending" was witnessed during the last round of forbearance in 2008-2009, said chief economic adviser (CEA) KV Subramanian.

“One of the other key aspect that must be kept in mind is that forbearance is necessary at this point in time but the previous episode in 2008-09 illustrates very well the kind of zombie lending that continued, evergreening that happened during that time which came back to bite three-four years later," said Subramanian. He was speaking at Ficci’s non-banking financial company (NBFC) Summit on Thursday.

“One of the other key aspect that must be kept in mind is that forbearance is necessary at this point in time but the previous episode in 2008-09 illustrates very well the kind of zombie lending that continued, evergreening that happened during that time which came back to bite three-four years later," said Subramanian. He was speaking at Ficci’s non-banking financial company (NBFC) Summit on Thursday.

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He said all financial institutions and their boards in particular should keep a watch on lending. "For instance, lending to firms with interest coverage ratio (ICR) of less than one increased significantly after 2008-09 and that is the kind of thing must be watched."

ICR is the ratio of a company’s earnings before interest and tax to interest expenses and is a measure of the debt-servicing capacity.

Non-bank financiers, he said, must keep in mind the interconnected risk which arises when mutual funds invest in their commercial papers (CPs).

“At this point in time, while the regulators are mandated to monitor these things, at an individual level every NBFC needs to monitor its rollover and interconnected risk as well. I think it is in times like these that the prudential measures must be taken by each NBFC to ensure that risks do not mount," he said.

According to Subramanian, the financial sector should look at covid-19 crisis as such an opportunity in India.

He said the ratio of private credit to GDP is about 52% in India, whereas the Organisation for Economic Co-operation and Development (OECD) average is about 160%. India, he said, is one -third of the OECD average and especially in some areas like the north-east, the credit to GDP ratio is less than 10%.

“I think just this simple fact should tell you how much work there is to be done and while we certainly deserve to pat ourselves on the back for good work, I think it would not be inappropriate for me to say that especially for the financial sector in India: miles to go before we sleep," he said.

Subramanian added that no country has been able to grow fast over a long period of time, without having its financial sector lead the growth. Typically, if you want X% of growth, in the economy 1.5X has to be the growth of the financial sector, he added.

“If you look at the Japanese economy in the 1980s, when it grew really well, of the top 25 banks globally, 18 were Japanese. If you look today, of the 100 top global banks, 18 are Chinese and yet the fifth largest economy in the world has only one bank in the global top 100 – State Bank of India. These illustrate how far we have to go," said Subramanian.

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