Approach to bad debts

This Bloomberg article via MINT shows India off in a better light in its approach to dealing with the issue of non-performing loans in the banking system.

“In India they are being out there, being vocal and trying to get people to act,” Keith Pogson, a senior partner for Asia-Pacific financial services at Ernst and Young Llp.

The countries differ when it comes to transparency. China’s official non-performing loan estimate of 1.67% of total loans, as of 31 December, is well below some analysts’ estimates of as much as 30%. An audit by the Reserve Bank of India (RBI) that finished on 31 March is expected to show that the percentage of non-performing loans has climbed to 18% from 14%, according to Credit Suisse Group AG.

‘Clearer picture’

“The Indian plan seems to be more advanced than the China one as not only do we have a clearer picture of the size of the impaired loans, we also know what the tools will be to attempt a fix,” said Jean-Charles Sambor, Asia-Pacific regional director at the Institute of International Finance. “In China, the situation is quite different. There are still some debates on the size of non-performing loans.”

The article strikes a familiar but wrong note in asserting that China has the resources to recapitalise its banks.

To be sure, China has significant resources from which it can deploy against any banking crisis. The financial system is awash with liquidity, allowing banks to continue lending. The nation’s huge current account surplus is also a key bulwark because it means banks can fund themselves domestically.

If one did not know the extent of the problem, there is way of knowing what the capacity of the country is, to deal with it.  Second, current account surplus is not what it is cracked up to be, if the analyses of Chris Balding is any indication.


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