India’s banks have higher bad-debt ratio on average compared to Chinese lenders, and the nation’s regulatory system also appears to be less prepared for a financial crisis.
Indian banks’ bad-debt ratio stood at 5.1 percent as of September 2015, according to the Reserve Bank of India. That compares with 1.59 percent for Chinese banks in the third quarter of last year.
The South Asian nation is showing less willingness than China to introduce international guidelines into domestic law to reduce systemic risk to its financial system.
India hasn’t implemented any of the eight bank resolution regulations recommended by the Financial Stability Board to give authorities greater power over potentially insolvent banks.
This may mean that its banks may collapse more quickly and financial spillovers could be worse in the event of a meltdown.
India’s financial regulators may not be focused on meeting global standards as outlined by the G-20 and the FSB. Instead, regulators are focused on reducing banks’ operational and cyber-security risks.
This difference in focus may reduce their capital costs but increase systemic risks. India’s largest banks include the State Bank of India, HDFC Bank, ICICI, and Bank of Baroda.
China has implemented four of the eight FSB bank resolution regulations, while Japan has met seven.
China’s largest banks, classified as global systemically important banks by the FSB, are ICBC, Bank of China, Agricultural Bank of China, and China Construction Bank. Japan’s G-SIBs are Mitsubishi UFJ, Mizuho and SMFG.
Bad debts and weak laws may lead to a higher chance of a banking crisis.
The views expressed in this article are those of Alex Gardner, an analyst at Bloomberg Intelligence.
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