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We spoke last week about several US banks that were facing bad loans on their books but, hugely significant as the American economy is, it is not the only one that matters. The Indian economy has now grown to be in the top five in the world with a GDP of around $2.79 trillion but that to some extent masks the problems. India, with its huge and growing population, has a very low per capita GDP by international norms with its nominal GDP in 2018 139th in the world and its Purchasing Power Parity GDP ranked 118th. This hints at one of the problems that India faces as a result of the pandemic, the fact that many citizens are living in poor conditions – Dharavi in Mumbai has a million residents and is one of the biggest slum areas in Asia – and a very fragmented healthcare system. There is an enormous variation in the quality of healthcare provision depending on where you are in the country. India’s federal system has helped underpin significant variation between healthcare in the various states – Kerala is good, Rajasthan considered the opposite for example – between urban and rural areas and between public and private systems; middle and upper class citizens tend to opt for the latter.

Travelling through Delhi airport in early March this year, I noticed that India was on the alert. I was temperature-tested on arrival and was required to fill in a form giving relevant and personal health details. At that time, Covid appeared to be under control. However, the situation has deteriorated alarmingly since then. India has now passed the one million cases mark and is at around 30,000 deaths; and that is likely to be an understatement of the real position given problems in testing in such a vast and fragmented healthcare system. This is a still-developing human tragedy but the economic fallout is also concerning.

For years the Indian financial system has been going through a clean-up process. Bankers, such as Rajnish Kumar, the chairman of the State Bank of India (SBI), were looking forward to reaping the benefits of the hard work that had been put in before the pandemic struck but now this is not going to happen. Mr Kumar is worried that large loan write-offs may be imminent and he should be listened to; his bank has $500 billion of assets on its books. If he thinks that write-downs will be needed, he is an ideal position to judge. In his view hotels and airlines will be in trouble (in common with such industries in many other countries) as well as the jewellery business (which is very large in India). SBI has already had to ride to the rescue this year when in March Yes Bank, already loaded down with bad loans before the virus hit, failed and had to be bailed out. Now that event will likely be just the precursor of something far bigger.

Mr Kumar suggests that several options might be on the table. One is for the government to intervene and help with the capitalisation of struggling banks. Debts may have to be rescheduled and in some cases written-off altogether. Since tough lockdown measures were introduced in March, a temporary moratorium on loan repayments until August has helped to buy some time; but as the clock ticks its way around towards midnight, the time for some kind of reckoning is at hand. Bankers are very worried that without government intervention a number of businesses will fail and dilute their loan books. If that were to happen, it would feel like a return to square one. They will be desperately hoping for a quick bounce-back. The great Hindu festival of Diwali, the Festival of Lights, falls on 14 November this year. Bankers will be crossing their fingers that by then they have something more positive to celebrate.

Wayne Bartlett is an author for accountingcpd. To see his courses, click here.

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