By Snigdha Kalra
The trouble of banks with Non-Performing Assets (NPAs) seems unwilling to subside. Thus, taking urgent action seems to be the most natural thing to do. These sentiments were resonated by the Reserve Bank of India (RBI) Deputy Governor, Viral Acharya, at the Delhi Economics Conclave 2017 on Saturday.
When asked if the cleaning of the balance sheets of banks were a more urgent matter than interest rate cuts, Acharya said that it was certainly their number one priority. While speaking on the topic Future of Cash, he also appreciated the shift in the pattern of public savings post-demonetisation, saying that there has been a shift from investment in property, to investment in structured assets like Mutual Funds.
The conclave, a one-day event, was inaugurated by Finance Minister Arun Jaitley.
The performance so far
A Non-Performing Asset, or an NPA, is a loan on which dues have not been paid, to the extent that it is at risk of default. The percentage of Gross NPAs reached 9.6 percent in March 2017 from 9.2 percent in September 2016, a record high.
The majority of this problem accrues to the public sector banks (PSBs) due to a priority sector lending to many inefficient borrowers and an ineffective recovery mechanism. According to the Financial Stability Report released by RBI in June 2017, PSBs continue to show negative Return on Assets (ROA). Moreover, the GNPAs are expected to rise to 10.2% by March 2018. However, a wave of positivity is also seen approaching, with the stressed advances ratio of banks has declined. Moreover, the capital to risk-weighted assets ratio (CRAR) has also improved from 13.4 percent to 13.6 percent between September 2016 and March 2017.
Solutions to the troubles?
The government and the RBI have been implementing a host of measures to tackle the monster that is the NPAs. In a major step taken recently, the RBI directed banks to refer 12 of the largest NPAs to National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC), for resolution proceedings. These 12 accounts, including Amtek Auto, Essar Steel, and Alok Textiles, account for about 25 percent of the total bad loans. Declaring these accounts insolvent is a stringent measure in the crackdown against bad loans.
The RBI also shared a list of 50 biggest loan defaulters with the government, which included big names like Videocon, Jaypee Group, and Essar. A bill was also introduced by Mr Arun Jaitley on Monday, to replace the NPA ordinance issued in May. The Banking Regulation (Amendment) Bill 2017 will allow the Centre to authorise RBI to direct banks to initiate insolvency resolution proceedings for a defaulting account.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act of 2002 was amended in 2016 to prevent delays in recovery of assets from defaulters. Other measures such as corporate debt restructuring (CDR) and haircuts for banks are also aimed at dealing with this problem.
The demonetisation effect
While speaking at the conclave, Mr Viral Acharya pointed out that post-demonetisation, peoples opinions on black money have changed. He noted an increase in the preference for financial instruments.
With the inclination of Indians towards investment in property, more than 80 percent of Indian household savings are in the form of property. Taking up this topic, Acharya said, They keep building up a pile of black money as soon as their first salary hit their pockets. We seem to have a very clever innovation or jugaad that we by and large dont store cash that much. We have figured out a system of gold and real estate holding that we just keep moving in the system like a hot potato.
He said that there had been a nonlinear shift in savings since November and December. The property business, which thrives on black money, had taken a hit post the demonetisation of currency notes of Rs 500 and Rs 1,000 in November 2016. As such, the ease of buying property has become difficult to hide. This has resulted in a shift of savings towards mutual funds and structured investment programmes. However, while riding on the GST wave, the problem of bad loans still needs to be addressed, before it becomes unmanageable. While a rate cut has been in the offing for the past few months, tackling bad loans must and will be a priority for the RBI in the near future.
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