By Prashansa Srivastava
According to the data provided by the Reserve Bank of India, non-performing assets (NPAs) or bad loans of Public Sector Banks (PSBs) stood at a staggering Rs 7.34 lakh crore by the end of the second quarter this fiscal year, the bulk of which came from corporate defaulters. On the other hand, the non-performing assets (NPAs) of private sector banks were considerably low, at Rs 1.03 lakh crore, by September 30.
Amount of NPAs
Among the major public sector banks, State Bank of India (SBI) had the highest amount of NPAs, at over Rs 1.86 lakh crore, followed by Punjab National Bank (Rs 57,630 crore), Bank of India (Rs 49,307 crore), Bank of Baroda (Rs 46,307 crore), Canara Bank (Rs 39,164 crore) and Union Bank of India (Rs 38,286 crore).
Among private sector lenders, ICICI Bank had the highest amount of NPAs on its books, at Rs 44,237 crore by the end of September, followed by Axis Bank (Rs 22,136 crore), HDFC Bank (Rs 7,644 crore) and Jammu and Kashmir Bank (Rs 5,983 crore).
Reasons for NPAs
Non-performing assets, or assets that dont bring any returns, have been steadily increasing for a number of years. After the financial crisis of 2008, large corporations received hefty project proposals from capital-intensive industries such as power, ports, airports, housing and highway construction. With the Indian economy cruising on a wave of optimism, banks were only too keen to lend, often without sufficient evaluation of risks and returns. Policy paralysis and rampant corruption stalled these projects, rendering corporations unable to pay back loans. Since then, the amount of NPAs, in both public and private sector banks, has been skyrocketing.
GDP slowdown, which dwindles corporate profits, making them unable to pay back loans, is also an important cause for the rise in NPAs. Subdued domestic demand and rising uncertainty in global markets also reduce corporate profits. Relaxed lending norms and lack of thorough analysis of financial status and credit rating also encourages corporate defaulters. However, the sluggish legal system and the lack of a bankruptcy code in India does not empower the banks to recover the defaulted loans. Moreover, misgovernance and policy paralysis, which hampers the timeline and speed of projects, also encourages default. The worsening profit scenarios and mounting corporate losses are also known as the balance-sheet syndrome.
Effect of NPAs
Credit is an essential ingredient of economic growth and the lack of credit could lead to economic contraction. Carrying non-performing assets on the balance sheet places heavy burdens on banks. The nonpayment of interest or principal reduces cash flow, which decreases earnings. The rise in NPAs translates to a rise in corporate debt, which is terrible news for investors. Overleveraged and distressed companies hold up private investment and, thus, growth over a spectrum of industries. The balance-sheet syndrome, thus, holds up future growth and investment.
Loan loss provisions, which are set aside to cover potential losses, reduce the capital available to provide subsequent loans. Once the actual losses from defaulted loans are determined, they have to be written off against earnings. Stress in banking sector means that there is less money available to fund other projects, which has a negative impact on the larger national economy.
To maintain profit margins, banks have to charge higher interest rates. Stuck investments may also result in unemployment. In the case of public sector banks, the bad health of banks means a bad return for a shareholder, which means that the government gets less money as a dividend. Therefore, it may impact the easy deployment of money for social and infrastructure development and lead to significant social and political costs.
Measures to curb NPAs
The government has launched Mission Indradhanush to make the working of public sector bank more professional and has also proposed to renew the bankruptcy code. The RBI has also expanded Debt Recovery Tribunals (DRTs). There are now 39 DRTs, as compared to 33 in 2016-17, that will help to decrease the number of pending cases as well as expedite disposal of cases. However, a lack of efficiency on their part has failed to curb the rise of NPAs. Thus, the lack of safeguard by the banks and the unbridled corruption and red-tapism on the part of the government has thus contributed collectively to the rise.
Improvement of credit risk managementincluding credit appraisal, credit monitoring and installing an efficient system to fix accountabilityis needed to revive stranded assets. Banks should conduct necessary sensitivity analysis and contingency planning while appraising the projects and should build adequate safeguards against external factors. The strengthening of credit monitoring and the development of an early warning mechanism can play an important role to keep NPAs in check. To resume credit flow, the government must remove the roadblocks that have long stalled these projects. Structural reforms and a credible commitment of capital are two essential factors that can revive the banking sector.
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