Indian Banks and Emerging Markets: A Comparison

Indian banks are recently said to be crippled with liquidity crunch and burdened with rising bad loans. Is it just India, or the phenomenon is same everywhere? Is economic freedom better or worse than them? How better is India getting at digital payments when compared to other emerging markets? Some of these questions will be answered here.

Indian Banks: The Banking Balance Sheet

The Indian banks are under stress in current times. The economic slowdown is only adding to the woes. The Indian banking system is burdened with 9.2% of bad loans. This means for every ₹1000 lent, banks have given up hope for ₹ 92. China has a total NPAs of just 1.8% of total loans. Meanwhile, Brazil (3.1%), Mexico (2%) and Indonesia (2.4%) too, have shown lower NPAs.

This problem of Indian NPAs is concerning because the NBFC crisis is only going to add up in this figure. Failure of the ‘Mudra’ scheme, low consumption demand and dwindling economy will aggravate the problem.

In the other news, India’s Capital Adequacy Ratio (CAR) stands tall at 14.1%. CAR is the capital banks keep with themselves as safety if the loan is unpaid. Therefore, if banks lend ₹100 in total, they keep other ₹14 aside to cushion the losses from bad loans and not fall.

As said above, this supports that Indian banking fundamentals are strong. Countries like China, Russia, and other strong emerging economies have CAR along the same line. Turkey and Brazil have gone slightly overboard. South Africa has reached a healthy CAR jumping by almost one percentage point.

The Retail Banking

It is that one aspect where India stands apart from the entire world. According to the World Bank's Global Findex Report, 55% of bank accounts opened globally between 2014-2017 belonged to India. While in 2014, 53% population had bank accounts, it rose to 80% in 2017.

East Asian economies, especially the Philippines, have added a significant number to the banks. With over 70% of adults owning a bank account, they are now pushing for a digital economy like India.

South America (65%) and Africa (53%) have shown growth of nearly 7-8 percentage points each. India though has risen significantly; it is still the world's second most unbanked population after China.

The Credit Score

The reason SBI Cards IPO is being talked about is India’s untapped potential. Credit Card ownership per 100 people is much lower in India than developing countries, let alone developed. With a strong ‘savings’ culture, Indians have just 3 credit cards per 100 people.

Japan, an economic superpower but shares a similar savings culture, has over 200 cards per 100 people! Asian economies like South Korea (200) and China (40) are far ahead of India.

The ATMs

Here is the data on the number of ATMs per 1 lakh people in any country. India lags far behind its BRICS partners. A new powerhouse of Asian economy-Vietnam has successfully surpassed India in recent years. The low number of ATMs evidently shows why chaos erupted after demonetization.

Bank Credit to GDP Ratio

This ratio shows how much lending is done through formal channels. This indicator shows the depth of the banking system in a country. For instance, India has reached out to its large unbanked population under Jan-Dhan Yojana. Still, do people borrow from the banks? How many roles do banks play in a nation's economic activity? Such questions can be analyzed through the following data.

China's banks have not just led its growth over the years; they have also fuelled their ambitions to become a global superpower. Be it China-Pakistan Economic Corridor Belt, and Road Initiative or occupying Sri Lanka's Hambantota Port, Chinese banks have played a vital role in backing such projects.

India's banking credit appears to be sound relative to other BRICS partners; however, the data hides that India's most credit goes to the industries, unlike Russia or Brazil.

The Ease of Doing Business: World Bank parameters

'Ease of Doing Business' is a prestigious ranking classification done by the World Bank. It judges countries over 10 parameters. Here the discussion is about the 'Getting Credit' ranking since it measures only the credit coming from banks and NBFCs, the formal channel.

However, something very contrary to assumption, scores here show inconsistency with 'bank credit to GDP ratio.'

The Bottom Line

This article tries to analyze India's standing by numbers. While on some indicators like 'doing business' and retail banking, India fared well; some other parameters like availability of ATMs are worrisome. Indian banking enjoys the trust of Indians and we see that in most places, India is at par with other emerging nations. However, more has to be done if India plans to go ahead and stand with superpowers like the US, China, and Japan.