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India’s Fragile Financial System Is Swinging

India’s fragile financial system is swinging between despair and hope. Two separate incidents — both featuring the lender Yes Bank Ltd. — recently underscored the drag of past underwriting follies as well as the lift from a digital reset. It will take time, but good things will come to Indian banking as a result of the present crisis.

Start with the sudden default by financier Altico Capital India Ltd. on a Rs 19.97 crore($2.8-million) interest payment to Abu Dhabi-based Mashreqbank PSC. Clearwater Capital Partners-backed Altico, which borrows money from banks and mutual funds to make loans to property developers, called the situation a “liquidity crisis.” And that made Yes Bank investors gloomy.

Based on January data, the midsize Indian bank had a Rs 450 crore exposure to Altico, the third-highest after Mashreq and HDFC BankNSE -1.45 % Ltd. While HDFC Bank, the country’s most valuable lender, has the capital — and current profit — to take the occasional credit hit, Yes’s capital cushion is already frayed by dodgy loans to beleaguered shadow banks and troubled tycoons. Both these borrower groups have found it hard to refinance debt since the collapse last year of IL & FS Group, a large Indian infrastructure financier and operator. Altico’s unraveling shows that an end to credit woes is not yet in sight.

At more than $200 billion, India’s world-beating pile of bad loans is bigger than Italy’s. State-run Indian banks are carrying the bulk of the burden, but at least they’re getting dollops of taxpayers’ money and being merged into fewer banking groups. A private-sector lender like Yes doesn’t have a formal public backstop. If it can’t fend for itself, the central bank could step in and force an arranged match with a better-run bank. The terms won’t be favorable to Yes shareholders.

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