Apartment buildings in Palava City, Mumbai Image Credit: Bloomberg

Dubai: India’s ailing banking and real estate sectors together are expected to hurt non-resident Indians (NRIs), particularly those working in the GCC countries as they tend to invest a significant portion of their savings in term deposits and real estate.

The banking sector laden with an unprecedented spike in non-performing loans (NPLs) have raised questions on the safety of deposits while the yields on deposit products have been on a steady decline as the Reserve Bank of India (RBI) continue to cut interest rates to boost the flagging loan growth in the country.

The real estate sector, another major area where Gulf NRIs park their money too have been going through a slump, is resulting severe erosion in property values and cash crunch for NRI investors.

Many who had invested in real estate and are looking to sell their properties to meet day to day expenses, including children’s higher education are finding it hard to find buyers.

Liquidity affected

“The issues faced by Gulf-based NRIs are peculiar as they have no permanent residency in their host countries. Thus, they are forced to invest some portion of their savings in real estate and the rest in liquid asset classes such as term deposits and gold. Many are not savvy with financial market investments,” said Tom George, a marketing professional who has recently moved from Dubai to Kochi in the south Indian state of Kerala.

Liquidity is a major concern for Gulf NRIs, most of whose jobs don’t offer retirement benefits when they return home. That is probably the reason many keep their savings in bank deposits or in retirement schemes sold by banks and insurance companies.

The recent failure of Punjab and Maharashtra Co-operative (PMC) Bank has highlighted the risks depositors face when it comes to safety and liquidity. The PMC episode has highlighted bank deposits are no longer the safest option as the maximum deposit insurance offered in India is a meagre Rs100,000.

Looming NPA crisis

The number and value of non-performing assets (NPAs) of Indian banks have skyrocketed in recent years. At its peak, the gross NPA to advances ratio exceeded 11 per cent.

“The recent NPA crisis has been accompanied by a sharp decline in investment growth and a significant economic slowdown. Among the many factors that the crisis has been attributed to, a critical one is the dominance of government-owned banks in the system,” wrote Rajeswari Sengupta an Assistant Professor at the Indira Gandhi Institute of Development Research (IGIDR), Mumbai, and Harsh Vardhan, an Executive in Residence at the Centre of Financial Studies of the SP Jain Institute of Management and Research (SPJIMR), Mumbai, in a recent paper published in East Asia Forum.

In the last three years, the Indian banking system has lost Rs1.76 trillion (about $24.4 billion) on account of non-performing loans of 416 defaulters — each owing Rs1 billion or more — being written off.

A total of Rs2.75 trillion (about $39 billion) has been written off for entities that borrowed Rs1billion or more from scheduled commercial banks. As many as 980 borrowers have been enlisted by the RBI whose debts of more than Rs1 billion each had to be written off by banks.

As per a recent information furnished under the Right to Information (RTI) Act, State Bank of India (SBI), India’s largest bank, wrote off bad loans worth Rs766 billion of defaulters who owed more than Rs1 billion each.

Tip of the iceberg

This year’s Nobel laureate Abhijit Banerjee thinks the reported NPA crisis is just a tip of the iceberg and it could lead to deeper problems for banks as depositors lose trust in banks.

“Yes, it will create a mistrust. I don’t blame them (account holders). This is alarming. I think it’s just the tip of the iceberg. There is more. I mean just the pattern seems to be very revealing. No one is saying anything. The RBI is not very vigilant in giving warning to these banks and suddenly we find this crisis,” Banerjee was quoted by India’s TV18.

Real estate linkages

Indian banks’ gross non-performing assets fell to 9.3 per cent of total loans as of March, from 11.5 per cent a year earlier, according to the RBI. But analysts fear the banking sector NPA pile could bulge with the emerging deeper slump in real estate sector.

The number of property developers falling into bankruptcy has doubled during the past nine months, piling pressure on non-banking finance companies (NBFCs) who have lent money to these developers. Bankers fear that banks could be affected by the property cash crunch in three ways through banks’ direct exposure to NBFCs, their own direct exposure to developers and through mortgage and other loan defaults.


Slowing economy combined with rising unemployment is also expected to contribute to higher NPAs in the banking sector. Global credit rating agency Moody’s Investors Service earlier this month cut its growth forecast for India for the fiscal year that began in April to 5.8 per cent from 6.2 per cent.

The International Monetary Fund (IMF) has slashed its growth forecast for India from its earlier forecast of 6.8 per cent to 6.1 per cent in the latest World Economic Outlook report.

Quoting several industry sources, Reuters reported last week that Indian builders are struggling to offload properties, even though they are ready to offer buyers up to 25 per cent discounts on listed rates. The situation now is so severe that real estate inventories across India are at an all-time high of nearly four years and property prices have not risen in most parts of the country in the last 4-5 years.

According to property consultancy firm Anarock, projects worth Rs1.8 trillion ($25 billion) are stalled across India. Analysts said stalled projects and piling inventories are likely to result a jump in loan defaults and ultimately the health of banking sector.

Are banks headed for zombie zone?

A 'Zombie' bank is a bank that is practically insolvent but continues to exist through hiding bad loans on their balance sheet. The bank can continue its operations by rolling over bad loans instead of writing them off. This process is called as forbearance lending or zombie lending.

When too many of a bank’s customers are falling into severe indebtedness, the bank will also fall into insolvency. An insolvent bank has a tendency to continue to give loans to debt trapped borrowers to show that everything is fine. Doing so, the bank is hoping for an improvement of the situation of its borrowers. Here, the bank is hiding the truth to escape from the punitive actions of the regulator.

Stringent regulatory scrutiny of asset quality, recognising the NPAs and making necessary provisions are important in preventing banks slipping into zombie zone. In India’s case the domination of public sector banks and their huge share in NPAs will add to government’s fiscal burden to write off bad loans and recapitalise these banks.