While their stock prices may look different, Indian banks are far from being healthy. Just compare them with their counterparts in other emerging markets and one wonders why they command a premium in valuation.

The Reserve Bank of India's trends and progress of banking in India report details a comparison.

Notwithstanding a mammoth recapitalisation drive by the government and despite using every trick in the book to bring down dud loans, Indian banks had the highest bad loan ratios and one of the lowest capital levels among emerging markets as of September.

India’s banking sector had a capital adequacy ratio of 14.1% and the system bad loans formed 9.2% of total loans. In comparison, Chinese banks had the same level of capital but a lower level of 1.8% of bad loan ratio. Other economies such as Indonesia, Brazil, Mexico and even Russia showed healthier ratios. The biggest improvements in capital ratios were seen in Turkey and South Africa where ratios improved by 210 basis points and 90 basis points respectively from FY16 levels. One basis point is one-hundredth of a percentage point.

Non-performing loans ratio (%)
Non-performing loans ratio (%)

Click here to view the enlarged version of the graphic

After falling marginally over two years, bad loans have increased in the past two quarters as fresh stress has emerged from the non-bank financial companies (NBFC). The country’s telecom sector too is showing signs of stress while fresh talk of farm loan waivers is deepening an already weak agriculture credit. On the resolution side, banks are finding little comfort as major cases have been mired in litigations. Despite the insolvency code speeding up resolution process compared to earlier distress resolution routes, the progress is wanting. Big marque cases are yet to be concluded and all banks have done is rake up provisions out of their profits every quarter. To be sure, a slowing economy is making things worse too. Loan growth has dropped owing to a moribund investment climate and a slowing consumption demand. While lenders have been pushing retail credit, the growth fillip from this segment is limited.

In fact, the Reserve Bank of India (RBI) has warned on stress from even retail loans given the concerns over income and employment off late as well as consumption slowdown.

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