By Sunanda Natrajan
Boasting a meagre, negligible decrease of 0.2%, the Gross Non-Performing Assets (GNPA) of Indian banks has dropped down to 9.8% from 10%, as on September 2017. Having consistently shown a dangerously high proportion of bad loans and a low recovery rate for the past decade, the GNPA ratio of the Indian banking sector, according to the latest RBI report, is expected to rise to 10.2% in March 2018.
An analysis of past trends
Non-performing assets or to put it simply, bad loans, are loans extended by banks which become irrecoverable and hence, the banks are expected to write them off and bear the brunt of the losses. In the scenario of the banking system, loans are the assets and the proportion of bad loans pertaining to a particular bank represents the asset quality of the banks, often referred to as stressed assets. Declining recovery rates and increasing NPAs combine to produce huge losses in profit and credibility for the banks, which can go up to the extent of banks seeking bailouts and even declaring bankruptcy.
For the past 12 years, the rate of recovery of GNPAs in Indian banks has been deteriorating steadily and hit its lowest point at 20.8% in 2016-17. After peaking for long at well above 40%, the NPAs were as high as 61.8% in 2009, according to an RBI report Trends and Progress of Banking in India 2016-17. In 2015-17, the ratio hovered around 26.4%, with the private sector rates being much higher at 41%, compared to the public sector banks. The latest Financial Stability Report (FSR) by RBI states that the Banking Stability Indicator (BSI) has worsened by great extents between September 2016 and March 2017 and under the baseline scenario, the macro stress test anticipates a ratio of 10.2% in March 2018. The BSI encompasses five dimensionssoundness, profitability, liquidity, efficiency and asset qualityand the declining ratios overtime are attributed to deterioration in asset quality and profitability. Furthermore, in severe stress cases, the Central Bank has even warned that a major credit shock is expected to occur, which will impact capital adequacy and long-term profitability of numerous banks.
This unfailing upsurge in NPAs simultaneously witnessed an increase in the provisioning by banks, another vital factor which affected their profit margins. In FY16, 12 out of 21 public sector banks reported a loss and in FY17, 10 suffered losses. Meanwhile, amongst the private sector banks, only one bank each reported a loss during FY16 and FY17. Consequently, the overall Return on Total Assets (ROTA) was negative for the public sector banks in FY 16 and near to zero in the subsequent year.
Twin roles of the government and the RBI
So far, a number of measures have been devised by both the government and the RBI in order to correct the situation and improve the functioning of Indian SCBs. First off, an Asset Quality Review was introduced by the RBI in 2015 in addition to its Annual Financial Inspection (AFI), carrying a much larger sample size to check the aggregate quality of assets held by the bank. The AQR, coupled with transparent and realistic recognition of NPAs by banks, revealed stunning results about NPAs and the banks standing in the economy. As for the government, under its Indradhanush plan, Rs 70,000crore was provided to tackle high NPAs and comply with capital adequacy norms. Furthermore, the Insolvency and Bankruptcy Code (IBC) was enacted in 2016 to provide time-bound resolutions for stressed assets. The primary objective of the IBC is to aid the restructuring of NPAs and to promote critical and timely identification of NPAs in banks. Under the code, cases have been addressed in the National Company Law Tribunal (NCLT) against 12 defaulters, who accounted for 25% of the NPAs of the entire banking system.
What lies ahead?
Despite these measures, the outcome is the 10.2% ratio of NPAs that is anticipated to materialise next month. Indisputably, the PMs unexpected announcement of demonetisation had a likely impact but one can only blame that to a certain point. The future of the banking system of our country has been at stake for way too long and it seems to be getting worse every year. In light of the above-mentioned reforms, there are a couple of loopholes associated with the securitisation and recapitalisation of banks that require attention. More importantly, the government can no longer resort to presenting recapitalisation packages to rescue banks from shutting down. Therefore, the need of the hour is to contemplate better lending decision-making on part of the banks and stricter penalisation of defaulters to enhance credit discipline and credibility of the Indian banking system.
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