Consumer loans leave India 'vulnerable'
Saturday, 18 August 2007
Jo Johnson, FT Syndication Service
NEW DELHI: A sustained slowdown in capital inflows could cause a hard landing in India and expose the extent to which inexperienced banks have dropped their guard in the face of surging demand for consumer loans, analysts warned last Thursday.
"We believe that, in the event of a sharp risk aversion in the global financial markets and/or a global hard landing, India's growth cycle is far more vulnerable than in the rest of Asia," said Chetan Ahya, a Morgan Stanley economist.
Like their western counterparts, Indian banks have been mispricing credit to riskier borrowers.
Morgan Stanley said last Thursday: "A significant part of the fresh lending of $318bn [euro 237bn, £160bn] over the last four years has come at a time when banks have been inadequately pricing credit risk."
While an outflow of some of the hot money that has flooded into India will help the central bank check the rise of the rupee, it could potentially reignite concerns about inflation in Asia's second fastest-growing economy.
As in previous global market meltdowns, investors are focusing on its excessive reliance on short-term portfolio investment to fund its gaping current account deficit.
Just 18 per cent of the $98bn of capital invested in India over the past four years has been in the form of long-term foreign direct investment, leaving it more exposed than other emerging countries to any reversal in global risk appetite. FDI accounts for about 75 per cent of the total capital invested in other emerging countries.
The BSE Sensex fell by more than 4 per cent in Mumbai trading last Thursday, off 643 points to 14,358.
Earlier this month the government tightened restrictions on external commercial borrowing in an attempt to reduce surplus liquidity and ease upwards pressure on the rupee caused by buoyant capital inflows.
A fall in the currency would benefit India's US-centric IT exporters, who have suffered from the rupee's recent surge.
It would also help other exporters who have suffered from the recent strength in the rupee, which has contributed to a steep downturn in India's export growth, now running close to its lowest levels since 2003.
NEW DELHI: A sustained slowdown in capital inflows could cause a hard landing in India and expose the extent to which inexperienced banks have dropped their guard in the face of surging demand for consumer loans, analysts warned last Thursday.
"We believe that, in the event of a sharp risk aversion in the global financial markets and/or a global hard landing, India's growth cycle is far more vulnerable than in the rest of Asia," said Chetan Ahya, a Morgan Stanley economist.
Like their western counterparts, Indian banks have been mispricing credit to riskier borrowers.
Morgan Stanley said last Thursday: "A significant part of the fresh lending of $318bn [euro 237bn, £160bn] over the last four years has come at a time when banks have been inadequately pricing credit risk."
While an outflow of some of the hot money that has flooded into India will help the central bank check the rise of the rupee, it could potentially reignite concerns about inflation in Asia's second fastest-growing economy.
As in previous global market meltdowns, investors are focusing on its excessive reliance on short-term portfolio investment to fund its gaping current account deficit.
Just 18 per cent of the $98bn of capital invested in India over the past four years has been in the form of long-term foreign direct investment, leaving it more exposed than other emerging countries to any reversal in global risk appetite. FDI accounts for about 75 per cent of the total capital invested in other emerging countries.
The BSE Sensex fell by more than 4 per cent in Mumbai trading last Thursday, off 643 points to 14,358.
Earlier this month the government tightened restrictions on external commercial borrowing in an attempt to reduce surplus liquidity and ease upwards pressure on the rupee caused by buoyant capital inflows.
A fall in the currency would benefit India's US-centric IT exporters, who have suffered from the rupee's recent surge.
It would also help other exporters who have suffered from the recent strength in the rupee, which has contributed to a steep downturn in India's export growth, now running close to its lowest levels since 2003.