India's understated asset quality problem...again

India's understated asset quality problem...again

While banking systems such as Italy and Greece are coming to terms with legacy bad debt and making some notable headway, it seems that India's situation remains mired in moral hazard and deterioration.

India's regulator has discovered about $3.6 billion of bad loans in the books of the State Bank of India, raising questions about stress in the  sector given underreporting elsewhere.

State Bank of India has stated an audit by the central bank showed bad debt was about 232 billion rupees ($3.6 billion) higher than what the state-run lender reported for the end of March 2017.  This is a "divergence" of 20%. The power sector seems to be a key area of bad debt underreporting. In addition, HDFC Bank Ltd. had a 20.5 billion rupee "divergence" - a "divergence gap" of 35%. Axis Bank reported a 26% "divergence". At YES bank, the "divergence" was extremely elevated.

Well, at least the issue is out in the market and public domain. As a result, measures can now be taken to plug the gaps and hopefully the banks will finally embark on a reform process in order to meet political and shareholder objectives and reassure their anxious depositors. Many international investors have exhibited goodwill to the sector: a favourite stock remains HDFC.