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Bad debt issues are becoming severe in emerging markets too and could hurt the global financial system

The lack of information about bad debts does not stop in developed countries. China, Brazil, Russia, and even India are dominated by state-owned banks whose lending is heavily influenced by politicians and they have less of an incentive to reveal the extent of the problem

The crash of 2008 was caused by two things. The first was a mountain of bad debt. This was accumulated during a period of economic growth when credit was given too easily to too many people. Of course this is a normal part of a business cycle. What looks like a good credit bet when times are good can look like a huge mistake when the economy turns bad. What turns a contraction into a crash is the other factor: bad information.

The information question is now causing problems for several financial institutions in developed countries. Bank of America's stock has fallen by 50% since May. Bank of America has $460 billion worth of real estate-related lending on its books and no one really knows how much it is worth. The real estate market in the US has continued to deflate, but information as to exactly how much is the subject of heated debate.

Like Bank of America, the shares of French banks including Société Générale, BNP Paribas and Crédit Agricole have been hit by large short-term losses. These were sparked by rumours, many of which turned out to be untrue. Still the risks associated with the French banks' exposure to potential losses from the sovereign debts of Italy and Spain are unknown. But the lack of information about bad debts certainly does not stop in developed countries. The issue is becoming quite severe in emerging markets as well.

China recently announced plans to bailout its local governments by assuming 2-3 trillion yuan ($308billion-$463 billion). The total amount of bad debts could go much higher, because many of these estimates do not include off-balance sheet loans. The information about debts in China is opaque even to the Chinese, much less to global markets. This could cause some severe problems. The ratings agency Fitch gave China the worst grade in its three-level scale of potential for systemic stress. Sixty per cent of countries that received the score had banking crises within a few years.

China is hardly alone. Most of the emerging market economies have been growing at a blazing pace. Over the past two years, emerging market economies have grown in excess of 7%, both stock markets and real estate prices have reached all-time highs. It would hardly be a surprise if there were credit problems, but information about the extent of the issues is hard to find.

India is a case in point. A recent report suggests that at least 17% of Indian banks' outstanding loan assets could be on the verge of default, and debt ratings for companies are deteriorating at the fastest pace since 2009. Public sector banks make up the vast majority of the banks in India and could be the worst hit, no doubt the result of loans to politically connected borrowers. The bad loans of the State Bank of India, the nation's largest lender, are a case in point. They rose 77% in the first three months of 2011, while the bank's net income fell 99%.

Brazil's banks are having similar problems. Brazil's biggest lender, Itau Unibanco raised its default-rate forecast for 2011 in July. Its shares have fallen 21% this year. In fact the entire Brazilian financial sector has lost more than its counterparts in Europe, as consumer defaults hit a 12-month high. But the exact numbers are not available, because Brazil has yet to implement recent legislation to allow Brazilian lenders to collect and share information on all borrowers.

Unlike Brazil, Turkey took the unusual step of lowering interest rates to protect itself from the wall of liquidity sloshing around the world. It didn't help. Despite attempts to curb bank lending, Turkey has experienced credit growth of more than 30%. Its reliance on foreign capital and a record current account deficit sets the stage for a capital flight crisis.

Not to be outdone, Russia's fifth-largest bank, Bank of Moscow, racked up at least 150 billion roubles ($5.4 billion) of unsecured bad loans. It recently required a $14 billion rescue. It may not be the only one required. Russia's banking sector, like the other BRICs, is dominated by state-owned banks whose lending is heavily influenced by politicians and not necessarily by accurate judgments of solvency. Worse, state banks have less of an incentive to reveal the extent of the problem, since their bad loans might reflect badly on those in power. So the information is likely to remain hidden until there are no alternatives.

But emerging market debt issues are not limited to emerging markets. The third-largest US bank, Citigroup, gets more than half of its profit from emerging markets. The stagnation of developed market economies has encouraged their banks to look to emerging markets for growth. Given the present issues in emerging markets, they might have been better off at home.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected]  or [email protected].)

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COMMENTS

Devon

5 years ago

Debt, and job loss is a big issue. Having credit is important and a valuable asset for anyone or any business. Growth and expansion of fresh ideas, & resolutions depends on credit. You can have the greatest idea ever thought, but without the opportunity to develop your idea, it won’t resolve much. It will take generations of work to resolve some of the complications of the economy, but where there is a will there is a way.

RBI panel proposes tough regulatory norms for NBFCs

Besides prescribing threshold limits, the working group headed by former RBI deputy governor Usha Thorat suggested that NBFCs should be subjected to the same regulations as banks with regard to provisioning norms and lending to stock brokers and merchant bankers

Mumbai: A Reserve Bank of India (RBI) panel has advocated tough new norms for non-banking financial companies (NBFCs) with the aim of strengthening the regulatory and supervisory framework for such lenders, reports PTI.

Besides prescribing threshold limits, the working group headed by former RBI deputy governor Usha Thorat suggested that NBFCs should be subjected to the same regulations as banks with regard to provisioning norms and lending to stock brokers and merchant bankers.

"Accounting norms applicable to banks may be applied to NBFCs," it added.

The working group further said that all NBFCs with assets of over Rs1,000 crore, whether listed or unlisted, should be made to comply with Clause 49 of the Securities and Exchange Board of India's (SEBI) listing agreement, which pertains to the composition of a company's board of directors.

It also called for annual stress tests and inspection of such NBFCs to ascertain their vulnerability.

The panel also suggested that NBFCs should have a minimum 12% Tier-I capital adequacy ratio-which is the ratio of the bank's core capital to its risk-within three years of registration.

It also recommended assigning a higher risk weight to the capital market and commercial real estate exposure of NBFCs that are not sponsored by a bank or do not have any bank as part of their group.

The RBI panel suggested the imposition of a risk weight of 150% for capital market loans and 125% for commercial real estate loans by such NBFCs.

It also advocated giving NBFCs benefits under the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act.

The panel, however, suggested retention of the minimum net-owned fund requirement (NOF) for all new NBFCs that wish to register with the RBI at the present Rs2 crore till the RBI Act is amended.

"The RBI should, however, insist on a minimum asset size of over Rs50 crore for registering any new NBFC. Existing NBFCs below this limit may deregister or be asked to seek a fresh certificate of registration at the end of two years," it said in the report.

Moreover, any transfer of shareholding, direct or indirect, of 25% and above, a change in control, merger or acquisition of any registered NBFC should have prior approval of the Reserve Bank, the panel suggested.

The working group also called for recognition that registration as NBFC with RBI provides comfort to lenders and investors and enables leveraging of public funds and simplification and rationalisation of the scope of regulation and registration.

The RBI has sought comments on the report from all stakeholders and the public by end-September 2011.

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Insecticides India plans to invest Rs70 crore on expansion

Insecticides India will set up a new plant in Rajasthan and also ramp up the capacity of the existing five plants

Insecticides India Ltd plans to invest about Rs70 crore over the next two years on expansion, including setting up a new plant in Rajasthan, a top company official said today.

"We are planning to expand the capacity of formulation and technicals in the next two years and for this, the company will set up a new plant in Rajasthan and also ramp up the capacity of the existing five plants," Insecticides India Ltd Managing Director Rajesh Aggarwal told PTI.

At present, the Delhi-based company has five plants in Rajasthan, Jammu and Gujarat, where it manufactures pesticide formulations and technicals (basic chemicals). Under the expansion programme, the company would ramp up its formulations production capacity to 5 lakh tonnes per annum from the current 3.5 lakh tonnes, while its technicals production capacity would be increased to 22,000 tonnes from 12,000 tonnes at present. Insecticides India is scouting for land for its third plant in Rajasthan, Aggarwal said.

Asked about the investment involved in the expansion plan, he said, "We will invest about Rs 60-70 crore on expansion." Aggarwal said the company has a presence in almost all parts of the country. Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu contribute about 40% to the company's turnover, which stood at nearly Rs480 crore last fiscal. Its net profit was Rs32.21 crore in 2010-11 fiscal.

Insecticide India's turnover grew by 20%, while its net profit rose by 14% in 2010-11 vis-a-vis the previous year. About one-third of the company's revenues come from four products--Monocil, Lethal, Victor and Thimet. The company had recently acquired insecticide brand Monocil from Nocil Ltd. Monocil is a systemic insecticide-cum-acaricide that controls a broad spectrum of pests in a wide range of crops.

In the late afternoon, Insecticide India shares were trading at around Rs384.80 on the Bombay Stock Exchange, 7.70% up from the previous close

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