India shows China how to deal with bad debt

India could teach China a thing or two about dealing with bad debt. Banks in the world’s two most populous countries have lent hundreds of billions of dollars to politically connected companies that are now in trouble. Yet while Indian authorities are at last pushing lenders to come clean, their counterparts in Beijing seem intent on ignoring the full extent of the problem. It is a rare example of India showing its larger neighbour the way. Most corporate lending in both nations resides on the balance sheets of banks, the majority of which are government-owned.

Larger-than-life Indian tycoons like Vijay Mallya and vast Chinese state-owned enterprises such as Bohai Steel have historically used strong political connections to help them borrow. That helps explain why lenders have continued extending credit even after companies run into trouble. The absence of a functioning bankruptcy process also discourages banks from calling in overdue loans. For years, Indian regulators hoped the country’s banks would grow their way out of the problem.

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