Moody’s Analytics on Tuesday cautioned that deterioration in credit conditions is already being felt in India, where slower economic growth and rising interest rates have made it tougher for borrowers to repay debt.
In the report How Bad Are Asia’s Nonperforming Loans ? Matthew Circosta, Economist, Moody’s Anaytics, said: “The Government has encouraged lending in an effort to support development of the country’s inadequate infrastructure.
“Although these intentions are positive, delays to projects and other regulatory issues have weighed on revenues, and thus, developers’ ability to repay debt.”
India and China have relied heavily on credit to drive GDP growth in the past 10 years, and on this metric, stand out as the most susceptible to a seizing in banking systems.
India’s non-performing loan ratio increased from a low of 2.3 per cent in 2011 to around 4 per cent in 2013.
Central bank data show publicly-owned Indian banks, which account for about 75 per cent of total lending, are largely responsible for the increase in non-performing loans.
Non-performing loan ratios tend to be low during periods of strong credit and economic growth, as new loans have had less time to go bad. But after a prolonged period of debt accumulation, non-performing loan ratios tend to rise, said the subsidiary of Moody’s Corporation.
Banking system Moody’s said some Asian economies are likely to experience an environment of slower GDP growth and higher interest rates in the coming years, which will make debt harder to repay.
“An increase in bad loans is also likely after Asia’s credit binge in recent years, which poses risk to the region’s banking systems and real economies. “Some of this lending is likely to turn sour, and a period of slower growth and tighter monetary policy will compound the upward pressure on non-performing loan ratios,” warned the report.
Circosta said the economic and financial pain witnessed in the US and the Europe illustrates what can happen when bad loans grow and corporates and households must de-leverage. It could lead to a vicious cycle of declining economic growth, falling asset prices, and weakening in credit supply and demand.