Bad-loan ratio set to worsen to 12.5%, warns RBI in its Financial Stability report

Bad loans at Indian banks are expected to swell to 12.5% of outstanding credit by March 2021, according to the Reserve Bank of India, after a prolonged lockdown hurt businesses and left millions jobless.

The ratio was already one of the highest among major economies at 8.5% at the end of March, as a two-year shadow banking crisis in India soured debt. If the macroeconomic environment worsens further, the ratio may escalate to 14.7% under the very severely stressed scenario, the RBI said in its semiannual financial stability report on Friday.

Any worsening of banks’ loan books would hurt their capital buffers and make it more difficult to extend credit just when companies need it most. A moratorium on loan repayments is providing some cushion for struggling businesses, but lenders may find a wave of loans turning bad after that relief ends in August.

Indian lenders from ICICI Bank Ltd. to Yes Bank Ltd. have announced plans to raise billions of dollars selling shares to boost capital as they brace for more spoiled loans.

So far, the volume of loans deferred ranges from 9% to 55% among traditional banks, while for shadow lenders it is up to 75% and for micro lenders the book under moratorium is as high as 95%.