Bankruptcy due to NPAs is the real problem in emerging markets

The failure to resolve the issues relating to non-performing assets-NPAs goes directly back to the central banks' largesse. They provided the time to allow these issues to be ignored. Now, it is both worse and too late

Last week, I read a rather disturbing story in the financial news. According to the article, Moody’s, the rating agency, downgraded Singapore’s banking sector to ‘negative’ from ‘stable’. Singapore? Last September, I wrote about problems with banks in several emerging markets, but Singapore was not on the list. It has not received a downgrade since the financial crisis. Its four banks are rated ‘Aa1’, some of the highest rated banks in the world. My first thought was how did this happen and what does it indicate for other emerging markets?


Singapore banks, like every other private bank, want to increase their profits. Like many other international banks this meant increasing loans to higher risk emerging markets. Singapore’s banks lent mostly to borrowers in Southeast Asia. They were successful in doubling their profits, but also their exposure. The region now represents the source of about 40% of those profits. But the region also represents a disproportionate amount of the risk. Last year borrowers outside Singapore were the source of 77% of Singapore banks’ nonperforming loans. What is more disconcerting is that the banking systems in other Southeast Asian countries, like Thailand or Indonesia, seem healthy. It might be time to change that assessment.


What may not be so healthy is the South Korean economy. Korea is caught in a very bad place. It is very difficult for an economy heavily based on exports to grow if its main market, China, is slowing, while its main competitor, Japan, has depreciated its currency. The result is predictable. Whole swaths of its economy including shipping, ship building, construction and real estate are having major issues. The bond market has already experienced a number of bankruptcies and its nonperforming loans have been rising. 


Like China the rate of growth for the Indian economy has been declining since 2010. The predictable effect is a rise in nonperforming loans, up to 3.5% at the end of 2012. India is also like many other countries in another way. The published nonperforming loan number masks the real problem. Rather than push a borrower into default, it looks much better on a bank’s balance sheet if the loan is restructured. Theoretically, a restructured loan is supposed to be good for the overall economy by providing a bit of patience for companies going through a rough patch. Many don’t make it through.


The Reserve Bank of India (RBI) estimates that 15% of restructured loans eventually fail. In the US in certain categories the failure rate of modified loans is as high as 57%. Presently, the number of restructured loans held by Indian banks is roughly 6%. According Fitch, the rating agency the combination of restructured loans and bad loans will reach just under 12% in about 8 months, a level that has doubled in two years.


Brazil is not that different from its other BRIC colleagues. Its state owned banks are the worst offenders for making bad loans. The giant state development bank BNDES, the world’s largest, and the Caixa Economica Federal, the state run mortgage company, have both been downgraded by Moody’s two notches from A3 to Baa3, the lowest level of investment grade. The reason for BNDES is that it has targeted lending to a few favoured customers. It has lent more than four times the value of its tier one capital to its top ten customers. A particularly egregious example is loan to the mining conglomerate EBX. Alone, it amounts to 5.8% of BNDES’s regulatory capital. Grupo EBX is the energy and mining conglomerate owned by Eike Batista. Mr. Batista was once estimated to be the second wealthiest man in the world with assets worth $39 billon. Allegedly, he has lost 99.5% of his wealth and is now down to a mere $200 million.


The problems of the peripheral countries of the Eurozone are well known. What is not widely publicized is the issue of the countries of Central and Eastern Europe. Bad loans among all of these countries stood at 8.2% at the end of 2012. Some are far worse than others. The three worst offenders are Ukraine, where the NPLs level is more than 30%; Albania with more than 20%, and Romania, a member of the EU, whose banks are burdened with NPLs of close to 20%. The bad loans in Southeastern Europe have risen from 14.5% in 2011 to 17% in 2012.


Perhaps, the poster child for problem banks is Vietnam. Vietnam’s 50 banks made excessive loans to inefficient state owned companies and speculative property investments. A story repeated time and time across the world’s emerging markets. The banks’ nonperforming loans account for approximately 6% of outstanding loans, with a strong emphasis on the word approximately. While this has supposedly declined from last year, a recapitalization of the banking system will cost anywhere from 7% to 20% of GDP.


But the size of emerging market bad loans is not the real problem. The real problem is simple: bankruptcy. Countries have to take the crucial step of recognizing that these loans are not going to be paid back. They must do what is necessary to restructure their financial systems. They must take the losses and reallocate capital to more efficient businesses. They must privatize state owned banks whose loan portfolios reflect more political patronage than risk assessment. They must create efficient regulations that are strictly and fairly enforced. But the odds of this occurring are small. Recognition of the size of the problem could result in both a political and financial meltdown. So there are few incentives for doing so. It has simply been easier to accept the free money from central banks.


Without meaningful reform, the emerging market growth story is now past. With these burdens it is unlikely that it will revive anytime soon. Growth rates have been dropping for the past three years and will continue to do so until the inevitable collapse will occur. Time is not on their side. Ignoring these issues will simply make them worse. Reform is the only option, but don’t depend on it.


(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)



Ramesh Poapt

4 years ago

The issue is more serious than Govt thinks. Yet Govt plans to disburse 7lac cr. to agri sector thru banks.depositors should note the situation.RBI once told 'caveat emptor'to them.Insurance cover is not raised inspiteof repeated demand by amny and ML!However, lovers of banks/PSU banks are unfazed(mutual funds)!shocking...!

NSEL Proposes Settlement Options

NSEL has proposed a partial payment option. It remains to be seen how the stakeholders view them

The National Spot Exchange Ltd (NSEL), which is facing a payment crisis, today announced plans to implement the settlement of dues in accordance with exchange rules and bylaws. Mr. Anjani Sinha, MD & CEO of the exchange stated that following meetings with the members of the exchange, the buyers/ processors and also the Forward Markets Commission (FMC), the following options have been proposed and the final decision would be taken after due consultation with all stakeholders.

Option 1:

A.      There are 8 members/ processors, who are willing to pay as per the scheduled due date or even earlier. The total amount pertaining to such 8 members is Rs. 2181 crores.


B.      There are 13 members/ processors, who have offered to pay 5 % of their total dues every week, if the same is agreed upon. Total amount comes to Rs. 3107 crores approximately. Name of such members are as follows:


Sr No

Name of Party


Jugger nautes Projects  Ltd


MSR Food Processing


PD Agro Processors  Pvt Ltd


Shree Radhe Trading Pvt. Ltd


Sankhya Investments


Spin cot Textiles Pvt Ltd


Swatik Overseas Corporation


Topworth Steels & Power Pvt Ltd


Vimladevi Agrotech Pvt Ltd


N K Corporation


NCS Sugar




ARK Imports Pvt. Ltd.

C.      There are 3 processors with whom negotiation is still going on. The amount pertaining to these parties comes to Rs. 311 crore.









Option 2:

The exchange is in possession of Post dated cheques (PDC) from various processors amounting to Rs.  4900 crs. against their settlement obligation and balance parties have confirmed payment regularly. While PDCs are a commitment, the payout process may not roll out smoothly in a month’s time. Hence, the market participants have proposed Option 1 as a safer alternative.


FMC Officials have also asked for details of Members, Planters and other participants who are not cooperating with the Exchange in resolving the matter related to settlement cycle. The FMC along with other Government agencies would work together to ensure a safe and secure settlement of dues.




4 years ago

1)Commodity exchanges provide a platform for speculating on commodity prices.

2)Widespread speculation in commodities has fueled high inflation, which has been difficult to control.

Then would it be wrong to conclude?
That the common man is subjected to inflationary pressures because of these commodity exchanges, rather than benefit from the much talked about price discovery mechanism.


Vinayak Bhimarao Mudholkar

In Reply to Nilesh KAMERKAR 4 years ago

Thank you for explanation!

Vinayak Bhimarao Mudholkar

In Reply to Nilesh KAMERKAR 4 years ago

Dear Sir,
As an ordinary investor I would like to ask whether the shaken confidence in commodity markets may lead to lower inflation ?(The commodity transaction tax may also be helpful to curb the speculation)


In Reply to Vinayak Bhimarao Mudholkar 4 years ago

Sounds logical, but I do not know sir.

Sensex, Nifty may attempt to rally: Weekly closing report

Any market rally will be met by selling. The mood is bleak

With the second consecutive week of fall on the bourses, the Sensex and the Nifty hit their lowest level since 27 June 2013. On all trading days the benchmark indices closed in the negative. This is the eight consecutive fall for both Sensex and Nifty till Friday.


The Sensex lost 584 points (2.96%) to close the week at 19,164 and the Nifty settled at 5,678, down 208 points (3.54%).


On Monday, the benchmark continued the fourth day of decline, ahead of Reserve Bank of India (RBI) announcing its policy review on Tuesday, where analysts felt that there will not be any revision in key interest rates. On Tuesday, the RBI, as expected kept rates unchanged and reiterated that the recent measures to tighten liquidity would be rolled back in a calibrated manner as stability is restored in the forex market. Although this move was expected, stocks continued to fall. Even on Wednesday, the market remained negative, ahead of an announcement from the US Federal Reserve about the future of its stimulus programme.          


On Thursday, the market again ended in the red, even as the Federal Reserve, after a two-day policy meeting, maintained its bond-buying program at current levels. The market was hit hard on that day by a 62% crash in Financial Technologies Ltd (FT) and Multi Commodity Exchange Of India Ltd (MCX) that tanked 20% hitting its lower circuit at Rs512.05. FT-promoted National Spot Exchange Ltd (NSEL) announced a suspension of trading and merging of settlement cycles of all one-day forward contracts, except e-series following an order from the Department of Consumer Affairs (DCA). There were fears that NSEL will end up defaulting on its obligations.


Even the easing of the FDI rules by the government for multi-brand retail did not help the indices to gain any strength and ended in the negative for the eighth consecutive trading session on Friday.


BSE Information Technology (up 4%) and BSE Consumer Durables (up 3%) were the top sectoral gainers in the week while BSE Realty Index (down 15%) and BSE Power (down 10%) were the top losers.


The top gainers on the 30-share Sensex were Wipro (15%), TCS (4%), Infosys (3%) and Bharti Airtel (2%), while Coal India (10%), I T C (10%), ONGC (9%), Hindalco Inds (8%) and NTPC (8%) were the major losers.


This week the RBI clarified that foreign institutional investors (FII) who have issued participatory notes (P-notes) can only hedge their currency risk if they receive a specific mandate from their clients. This move is likely to further curb speculation, making sure all P-note related derivative trades are done for genuine customer needs.


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