Indian banks saddled with some of the highest bad debt levels in emerging markets: IMF

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NEW DELHI The recent arrest of Indian businessman Vijay Mallya highlighted the problem of bad loans in India, but analysts said the tycoon's unpaid debts are just the tip of an iceberg that is already holding back the country's economic growth.

The multimillionaire owner of a Formula One team, and the man behind the Kingfisher beer brand was arrested last Tuesday in Britain, where he had fled a year ago after allegedly defaulting on loans from Indian state banks worth more than US$1 billion (S$1.39 billion).

Indian banks are now saddled with some of the highest levels of bad debts in the emerging markets, according to the International Monetary Fund (IMF).

"Banks are so stretched that they are not even lending to healthy companies, holding back growth," Ms Rajeswari Sengupta, an economist in Mumbai, told AFP.

"That is a (lot of) collateral damage... The biggest fall-out is the lack of private sector investment - banks are stressed, private sectors are stressed and lending to corporates by banks has totally stalled."

Regulators, eager to spur growth, allowed many industries to restructure loans rather than write them off. They also agreed to a moratorium on interest payments.

The excesses of the period remained hidden as banks sought to keep companies afloat by giving them enough capital to service their loans - a practice known as ever-greening - to disguise their own bad debts.

By 2015, the share of companies it monitored that could not even service the interest on their loans had reached nearly 40 per cent, Credit Suisse said in a February report.

By September last year, about 16.6 per cent of loans to corporates - or about 8.4 per cent of the gross domestic product (GDP) - had been declared non-performing, according to Credit Suisse. "When the size of NPAs (non-performing assets) hits five per cent of the GDP, that is considered a crisis, and we have gone way past that," Ms Sengupta said.

By Credit Suisse's count, about 12 trillion rupees (S$259 billion) have soured, the bulk of it at public-sector banks.

Indian Finance Minister Arun Jaitley is looking for solutions.

One idea his ministry mooted was to create a single "bad bank" that would take over all bad loans and leave the existing lenders in healthier shape.