法国老佛爷品牌大全:India's Slowing Growth Will Test Banks' Resilience .

By HARSH JOSHI

Part of the reason lies in past bad lending decisions. After the peak of the financial crisis in 2009, India's banks opened the floodgates with loans to already over-leveraged companies. Credit Suisse looked at loans to 3,550 non-financial services companies in India with aggregate borrowing of $385 billion at the end of March and found that nearly 30% had net debt more than six times current earnings before interest, taxes, depreciation and amortization. That's increased by about 50% in the past five years.

A weakening economy adds to the pressure. In October, India's industrial output contracted 5.1% from a year earlier. A slump in demand from Europe and a slow recovery in the U.S. don't help. As output and revenue growth decelerate, companies' ability to repay debt suffers. The risk is spread across several sectors. India's private airlines, construction companies, utilities and real estate developers are all notorious for generating non-performing loans. All those sectors will suffer from an economic downturn.

To compound the problem, many companies have borrowed in foreign currency from local banks, taking advantage of lower interest rates overseas. But an 18% fall in the rupee against the dollar since April means they now face significantly higher repayment costs. Struggling borrowers could try to convert foreign debt into rupee-denominated loans or restructuring high risk loans to ease repayment conditions. For lenders, that's better than outright defaults but it will hurt profits.

Goldman Sachs estimates banks' gross non-performing loans including restructured debt will rise to as much as 6% of total loans in the next financial year, up from 5% in March. The Reserve Bank of India's stress test report published earlier this month forecasts 5.8% of non-performing assets in the worst-case scenario, double the current level.

India's banks aren't doomed. The RBI says the banks' capital to risk-weighted assets ratio fell from 14.5% at the end of March 2010 to 13.5% at the end of the latest fiscal year. That's still quite conservative, but the downward trend is a concern. At the very least, profits will come under pressure. Banks seldom perform better than the economy they serve. With India's economy heading into a testing time, its banks will suffer too.

Write to Harsh Joshi at harsh.joshi@dowjones.com