Correcting misinformed impressions about NPAs, and
the Swedish model for setting up a Bad Bank.
Chart 1: Real Interest Rate: Lending Rate Minus GDP Deflator
- By 2013, nearly a third of Indian companies had interest cover less than 1 (EC1), i.e., annual earnings before interest and tax (Ebit) less than interest. By 2015, nearly 40 per cent were at this level. From 2012 through mid-2015, EC1 companies’ earnings were around Rs 250 billion per quarter. By end-2015, earnings had dropped to Rs 20,000 per quarter, and by September 2016, to Rs 15,000 per quarter. Cash flow was insufficient to service debt from 2014. The result was a sharp increase in NPAs (Chart 2), which could increase to 11.1 per cent by September 2018.
Chart 2: NPAs
Sweden’s transformation after its banking crisis of 1991-1992 is remarkable. Their prior experience parallels ours in some ways, although our attributes are very different, i.e., small versus large, advanced/developing, highly skilled small population/underskilled large population, and so on. For years, Sweden was an underperforming economy with low real wage growth, high inflation and public debt. Then a period of rapid growth and credit expansion led to a real estate bubble and collapse, like ours.
Shyam (no space) Ponappa at gmail dot com