(Bloomberg) -- India's banking system is among those most vulnerable to profit declines as loan growth slows and soured debt rises, the International Monetary Fund said.
The ability of Indian companies to service debt is the lowest among 19 emerging-market nations tracked by the IMF, according to figures in its semiannual report on financial stability. The study showed that the South Asian country had the highest proportion of debt owed by companies that failed to make enough money to cover interest payments, which would leave its banks the most exposed to any economic or profit slowdown.
Weakness in the Indian banking system would be a blow to Prime Minister Narendra Modi, who is seeking to revive credit growth at a 22-year low in order to maintain the fastest pace of expansion among the world's major economies. The surge in banks' stressed assets to a 16-year high as of June 30 has made lenders wary of extending more credit.
While India is taking steps to reduce nonperforming loans, “additional and more timely action is needed,” according to the IMF report. The Reserve Bank of India completed an audit of assets at the nation's 50 banks on March 31 to force the lenders to recognize and provide for credit with a high default risk.
Reserves at Indian lenders were insufficient to cover the expected loss on soured loans under the current levels of debt-at-risk in the country, the IMF said.
“Additional nonperforming loans from debt-at-risk could overwhelm bank buffers in some emerging market economies,” the organization said.
The IMF's analysis of leverage in developing nations was part of a broader assessment of surging levels of global debt that complicates the task for policy makers, who have been urged to use fiscal policy to boost growth amid the waning ability of central banks to stimulate the economy. Gross debt in the non-financial sector has more than doubled in nominal terms since the turn of the century, reaching $152 trillion last year, and is still rising, the IMF said.
To contact the reporter on this story: Anto Antony in Mumbai at aantony1@bloomberg.net.
To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Darren Boey, Russell Ward
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