India’s High NPAs, NBFC crisis, China’s Corporate Debt & United States Bond Market Bubble could trigger the next Global Financial Crisis
HIGH NPA CRISIS IN INDIAN BANKING SYSTEM
With hardly seven months to go before the Lok Sabha 2019 election, how serious is the crisis in our banking system? As government and RBI both are very much under pressure because simply it is not going to be resolved any time soon, although Government of india is using all his bullets to stop the contagion to spread more into our banking system.
RBI’s latest financial stability report tries to sound optimistic. It says credit picked up in 2017-18 despite sluggish deposit growth. But it sees banks’ gross non-performing advances (GNPA) ratio worsening from 11.6% in March 2018 to 12.2% in March 2019. A Credit Suisse (CS) report says banks’ GNPAs climbed to Rs 10.09 trillion at end-March from Rs 8.82 trillion at end-December.
Even lots of public sector banks are finding very difficult to survive without capital infusion from the government and also on the other hands their profits and margins are getting eroded . RBI says their GNPA ratio may worsen from 21% at end-March to 22.3% by March next year. Nine of them will see severe capital shortfalls. At the same time, PCA banks’ loan books is also worsening.
NBFC HAS TRIGERRED THE INDIAN FINANCIAL CRISIS
India’s Leading Company in Infrastructure Leasing & Financial Services (IL&FS) recently defaulted on a Rs 10 billion rupees loan from SIDBI.
Its subsidiary defaulted on another Rs 5 billion rupees. It’s the first instance of an infrastructure development and finance company, with pan-India presence, defaulting on its debt.
Indian companies have enjoyed massive liquidity in past few years. Positive Market sentiments and Fund flows from domestic investors have been at the highest levels.
With so much liquidity and immense growth opportunities and PSU banks in the NPA crisis, non-banking financial companies (NBFCs) stepped in and started borrowing short-term to lend long-term.
They succeeded in expanding and gaining massive market share in very short time. But now, with IL&FS defaulting, investors will be discouraged to lend to NBFCs.
Once liquidity dries up in coming more months, these NBFCs will find it extreme difficult to finance their business. Their costs for borrowing fresh funds will shoot up tremendously. This will in a long term affect their margins and profitability.
And on the other side Corporates and Small Medium enterprises too, will feel the heat because it very difficult to raise money from NBFCs.
Funding for infrastructure will take a big hit. We will be seeing all of sudden huge slowdown in infrastructure projects and growth that will have a cascading effect to Indian economy because it will result in poor connectivity and slower pace of development of non-metro and smart cities.
IL&FS has consolidated debts of close to around Rs 1 trillion rupees. Of which it has defaulted on close to Rs 10 billion. Imagine the domino effect which it can be in future if it can’t pay the balance.
The chairman of LIC has hinted at increasing LIC’s exposure to IL&FS.
IL&FS’ long-term and short-term debt were recently downgraded to ‘D’ i.e. ‘default’ or ‘junk’ after it failed to repay its obligations.
In such a scenario, finding a buyer for its debt instruments will be difficult.
A lot of these loans to IL&FS were given by Indian banks who till today’s date are surrounded with NPA issues.
Adding all these stakeholders signifies how much is at stake on the revival of IL&FS.
China’s Corporate Debt Bubble
Over the past 12 years, China’s credit boom and trade dominance has been the largest factor driving global growth. That may be about to change soon as US & China Trade War is worsening and that will seriosuly harm growth in near future. President Xi Jinping’s administration is encouraging banks and businesses to start deleveraging. Meanwhile, the government is committed to doubling the economy from 2010 to 2020, and getting there will almost certainly require more loans and funding.
In 2008, China’s total debt was about 141 percent of its gross domestic product. By mid-2017 that number had risen to 256 percent. Countries that take on such a large amount of debt in such a short period typically face a hard landing. That’s why everyone—academics, private banks, the International Monetary Fund, the Organization of Economic Cooperation and Development, the Bank for International Settlements, and People’s Bank of China Governor Zhou Xiaochuan—is sounding the alarm.
As per the History and Data isn’t exactly on China’s side here. A meteoric rise in borrowing without comparable economic gains rarely ends well. The IMF identified 43 credit booms in which the credit-to-GDP ratio increased by more than 30 percentage points in five years. All but five ended with a significant growth slowdown or financial crisis. China’s debt-to-GDP ratio has risen 54 percentage points in the last five years. Moreover, it started from an elevated level, increasing the chance of a massive Corporate debt crisis looming, according to the IMF.
UNITED STATES BOND MARKET BUBBLE
Theres has lots of concerns and speculations has happened in past that “bubble” in the bond market really was on the verge to get burst during the end of 2012. The same has happened again in 2017 and 2018. This might leave investors wondering just what a bubble is and what the basis is for such claims.
WILL UNITED STATES BOND MARKET BUUBLE WILL BURST?
US corporate debt is seeing one of its worst sell-offs since 2000 after rising 63% in 10 years we can literally forecast next disaster in the making.
The corporate bond bubble which began in 1981 is beginning to burst and Quantitave Easing by Federal Reserve in last 10 years has only accelerated the decline.
U.S. corporate debt has risen from $40 trillion to $70 trillion since the top of the last bubble in 2007. That’s 63% in 10 years. It’s risen 135% since 2000!
Only government debt has risen faster, from $35 to $64 trillion, or 83%.
OMG China is the worst by far, going from $6 to $36 trillion or a 500% increase
The problem is these long-term rates have been rising since just July 2016. They’ve gone from 1.38% to 3.10%. That’s an increase of 172 basis points in the risk-free 10-year Treasury bond. That naturally reverberates up through the risk spectrum from investment grade corporate bonds to junk bonds.