India’s twin balance-sheet problem

(The Economist) - India’s macroeconomy chugs along (though the quality of government statistics remains questionable), but its corporate sector is ailing. The sudden and chaotic “demonetisation” of 86% of bank notes in November hardly helped. But the origins of India’s troubles go much deeper. After India dodged the worst of the financial crisis a decade ago, a flurry of investment was made on over-optimistic assumptions. Banks have been in denial about the ability of some of their near-bankrupt borrowers to repay them. The result is that the balance-sheets of both banks and much of the corporate sector are in parlous states. After years of burying their heads in the sand, India’s authorities now worry that its “twin balance-sheet” problem will soon imperil the wider economy. Both the Reserve Bank of India (RBI) and the government have nagged banks to deal with their festering bad loans. Around $191bn-worth, or 16.6% of the entire banking system, is now “non-performing”, according to economists at Yes Bank. That number is still swelling.