India's growing nonbank lending sector attracts global players, prime minister to step up crackdown on India's black money and China's rising interest rate reflects its fragile financial market.
Nonbank financing is rising in India and growth in the business is attracting global players, The Wall Street Journal reported. Lending from nonbank finance companies is up 40% to an estimated US$200 billion in the two years ended March, as compared to a 15% growth to US$1.1 trillion for bank loans, according to India Ratings & Research. The boom in nonbank lending, which targets the country's small businesses, is attracting global players such as KKR & Co. LP and Goldman Sachs Group Inc. which lend out funds through affiliates in India. KKR has so far lent nearly US$4 billion to Indian companies and B.V. Krishnan, an executive at KKR in India, noted that expected yields are in the high teens, the kind of returns that U.S. colleagues target for a successful leveraged-buyout deal, the WSJ said.
Indian Prime Minister Narendra Modi could further intensify his campaign against black money after his unorthodox move to phase out the country's 500 rupees and 1,000 rupees notes. The prime minister is expected to tackle income tax next, with plans to replace it with banking transaction tax, the Financial Times reported. The move, like his decision on demonetization, is likely influenced by a small economic group seeking radical changes in the country. Known as Arthakranti, the group advocates restricting cash use and the use of a single banking transaction tax. The idea has gained favor from some of India's influential people. However, CLSA senior economic Rajeev Malik noted that a due diligence is needed to determine how feasible and practical the move will be.
China's financial markets remain fragile and could still worsen in 2017 as the government continues to face uncertainties. Futures on Chinese government bonds plunged Dec. 15 after news that Sealand Securities incurred a huge loss after two former employees made unauthorized transactions in its bond section, The Nikkei reported. The plunge in price sent the country's benchmark long-term interest rate to the 3.4% level, up 0.6 percentage points from before the U.S. presidential election. As interest rates increase, some foreign financial companies are reportedly looking to reduce their holdings of government bonds, a move that could result in more capital outflow from China.
Bank of Korea warned that the debt repayment capacity of the country's most vulnerable households could fall amid a delay in economic recovery and rising interest rates, Reuters reported. The central bank in its bi-annual report on financial stability said that debt accumulation in the low-income basket and low-credit groups have so far outpaced disposable income growth. In addition, households could face higher interest rates as local yields track U.S. interest rates, which could further increase in 2017.
Economic reforms may have to take a backseat in Japan come 2017 given the diplomatic and security challenges that Prime Minister Shinzo Abe faces, Bloomberg News reported. Abe, who championed reforms under his so-called Abenomics, could take a pause on his economic policies to focus on foreign relations following uncertainties brought about by Donald Trump's victory during the U.S. presidential elections. Trump has earlier promised to withdraw the U.S. from the Trans-Pacific Partnership trade agreement, a deal that Abe pushed for in Japan. Trump's election also poses security risks for Japan which relies on U.S. military power to deter threats from North Korea's nuclear program and China's aggression towards disputed territories.