By Aman Bagaria
The Reserve Bank of India (RBI) recently revealed data on the loans given out by them to both priority and non-priority sectors and the number of bad loans or non-performing assets (NPAs) that each sector has led to. NPAs are loans and advances where payment of interest or principle has been due for more than 90 days or when an account remains out of order for 90 days in respect of an overdraft or cash credit, among other such similar dues. Basically, they are the loans and advances which discontinue fetching income to the banks. The priority sector refers to those sectors and segments for whom it is difficult to get credit such as agriculture, education, micro and small enterprises, housing, etc. Banks are to grant a minimum of 40% of their funds to the priority sector according to the RBI guidelines.
Analysis of the RBI data
According to the revealed data, there has been a steady increase in the amount of NPAs over the last five years. Over this period the amount of NPAs in the agriculture sector has increased to about 250% of the original from Rs 24,800 crore in 2012 to Rs 60,200 crore in 2017. This has been a result of an increasing number of loan waivers by the government and the demonetisation in more recent memory. A major factor that has contributed to the amount of NPAs in the agriculture sector is the increasing frequency of farm loan waivers. An expectation of loan waiver prompts the farmers to default on their loans and hence creating an atmosphere where defaulting on loan payments is acceptable. The increasing number of loan waivers has already had an impact on the balance sheets of lending institutions, the finances of states that give such waivers and on the interest rates of the loans that are granted. It also weakens a direct credit culture and impacts the credit discipline of the borrowers.
Another reason for the continuous increase in bad loans in the agriculture sector is bad crops. The Kharif and the Rabi seasonal loans have resulted in really poor returns as the expectant returns from the crops has not been realized. The situation with the rise in NPAs is bad in the priority sector, however, it is nothing compared to the already bad and ever worsening condition in the non-priority sector.
Comparing the agricultural sector to the non-priority sector
While the agriculture sector had 6% of their total loans categorised as NPAs, the figure was up at nearly 21% for the non-priority sector which consists mainly of corporate and infrastructure borrowers. While agriculture constitutes only 8% of the total NPAs of the banking sector, the non-priority sector accounts for about 77% of the system NPAs. Such a high number of NPAs of the non-priority sector only lead to a mood of carelessness for the farmers who feel entitled to default on their loans too. The incidence of NPAs across all sectors should be discouraged and reduced in all earnest and as quickly as possible. The RBI in collaboration with the government should take steps to better the situation.
Steps to improve the situation
There has been an increasing concern regarding the mushrooming NPAs in the banking sector. A lot of remedies have already been enforced by the government in collaboration with the RBI like the enactment of the Insolvency and Bankruptcy Code (IBC) which has laid down provisions for recovery of the companies that have declared bankruptcy so as to enable them to pay off their loans to whatever extent possible.This should result in a reduction in the number of NPAs in the banking sector. Another reform that has been introduced is the amendments in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and also amendments to the Recovery of Debts due to Banks and Financial Institutions (RDDBFI) so as to improve the resolution or recovery of bad loans.
Recently, a Parliamentary Committee had been formed that to look into the worsening situations in the banking sector and to suggest changes so as to make improvements. One suggestion of the Parliamentary Committee is to make changes to the outdated provisions of the SBI Act or other such relevant laws so as to disclose the names of those individuals that qualify as willful defaulters. This should discourage willful defaulters and improve the conditions around NPAs.
However, one drawback to this step may be that such publication may result in the failure with respect to the revival of distressed business units which may otherwise have been recoverable. Another recommendation of the Committee was to ensure a proper and stern audit mechanism should be made mandatory for a specific class of borrowers, especially those individuals who seek big loans. A ray of hope emerges with the news that asset reconstruction companies intend to step up bad loan purchases in the last quarter of this financial year. This should ease the pressure slightly on the banking sector and work in consonance with the IBC the role such companies shall play in doing away with the bad loans in the sector shall be crucial in improving the situation.
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