Current Status of NPAs in Indian Banks

These days banks as well as the govt are grappling hard to deal with the problem of Non Performing Asset (NPA) for arriving at some long term solutions. Accountability of banks as well as the govt can also be not ruled out. Our banks’ stressed assets i.e NPAs now stand at 9.6% of our GDP, or about half of Budget 2018.

Non-recovery of loans or interest on loans from the borrowers for more than 90 days is considered as Non Performing Asset (NPA) for the banks. That means the loan which does not bring return is an NPA. The banks can neither credit the income nor debit to loss, unless either recovered or identified as loss. Therefore NPAs result from bad loans or when the borrower defaults and thus become bank’s stressed assets. A borrower having multiple accounts, all accounts would be considered NPA if one account becomes NPA. RBI has been pushing the banks for their Asset Quality Review (AQR) to give an exact picture of their NPAs in their Balance Sheets. Raghuram Rajan the outgoing RBI chief had set a deadline of March 2017 for banks to disclose all their bad loans, including the ones masqueraded as restructured loans. Restructured loan is new loan that replaces the outstanding balance on an older loan, and is paid over a longer period, usually with a lower installment amount. Such Loans are commonly rescheduled to accommodate a borrower in financial difficulty and, thus, to avoid a default. Also called rescheduled loan. There has been so far an almost 80 per cent jump in gross bad loans in 2015-16. Banks’ total stressed loans, which stood at Rs 12.47 trillion at end-March 2018, or 14.3% of their total loans, were down slightly from Rs 13.29 trillion, or 15.8%, at end-December 2017.

The resultant sharp surge in provisions for bad debts eroded profitability, especially at state-owned banks. 29 state-owned banks wrote off a total of Rs 1.14 lakh crore of bad debts to clean up their balance sheets between financial years 2013 and 2015. Even as the government has been trying to shore up public sector banks through equity capital and other measures, bad loans were written off. In September, 2017 Moody’s, the global investors services, which rated 15 banks of India that accounts for 70% of banking system in India reports that pace of NPA formation is going to slow down in the next 12-18 months because of the operating environment that the govt of India has created for slowing down the NPA growth. Now let me explain as to what kind of operating environment created by the govt…. Well banks did get the support from the govt in improving their recoveries but the total climate of lending and investment has not been picking up that well as the govt level capital expenditure (CAPEX) is very high. In public sector e.g., railways - CAPEX may be growing by 30% or more than 30% year over year (YOY) but other than public sector, the private sector CAPEX has not been happening to the extent as it should have. Had it happened the economic revival would have been seen by us. In some segment if we see the quarterly results of the year 2017, let’s say June quarter and September quarter we saw some revival in some industries, not in all. The quarterly results of the corporates were visible then in 2017 may be because of the bad debts progress was quite high due to the drive of the then RBI governor Raghuram Rajan’s deadline of March 2017 to clean up the balance sheet. But we saw NPA happening in remaining 2 quarters also – i.e., December 2016 and March 2017 - inspite of revival trend remained the same and the pace continued. In fact NPA is the regular phenomenon – whenever lending is, NPA will be!

GoI is struggling to break the logjam. The bankers’ committee it set up has ruled out a ‘bad bank’ that would take over all toxic assets. Instead, it recommended a combination of a bank-led asset management company, alternative investment funds, and a platform to auction bad assets. It set a 90-day limit for resolution of bad loans to small and medium enterprises (SMEs). And it proposed inter-creditor agreements to speed up resolution under the Insolvency and Bankruptcy Code (IBC), which came into force in December 2016.

But banks are still in trouble! NPAs are likely to get much worse in the current fiscal, suggests last month’s i.e., June 2018 RBI report. In the RBI's Financial Stability Report, the apex bank said that the Gross NPA (GNPA) ratio of scheduled commercial banks (SCBs) is likely to rise in the current fiscal.

The last fiscal was a pretty bad one for the banking sector. Only two public sector banks (PSBs) managed to report a net profit - Vijaya Bank and Indian Bank - while the rest of them collectively posted a net loss of over Rs 87,000 crore. The problem of spiralling non-performing assets (NPAs) was not just limited to the state-owned banks. Bad loans of the 38 listed banks collectively crossed Rs 10.17 lakh crore in the fourth quarter. In comparison, the gross NPAs of all the banks in the country had amounted to Rs 8.40 lakh crore as on December 31, 2017.

But the worst is far from over for the sector. In the RBI's Financial Stability Report (FSR), the apex bank said that the Gross NPA (GNPA) ratio of scheduled commercial banks (SCBs) is likely to rise in the current fiscal. Moreover, the banking stability indicator showed that deteriorating profitability and asset quality pose "elevated risks" to the sector's stability.

"Macro-stress tests indicate that under the baseline scenario of current macroeconomic outlook, SCBs' GNPA ratio may rise from 11.6 per cent in March 2018 to 12.2 per cent [of total loans] by March 2019," the RBI said in a statement, adding that if the macroeconomic conditions deteriorate, their GNPA ratio may increase further.

I quote the Report that says "Among the bank groups, PSBs' GNPA ratio may increase from 15.6 per cent in March 2018 to 17.3 per cent by March 2019 under severe stress scenario, whereas PvBs' [private banks] GNPA ratio may rise from 4 per cent to 5.3 per cent. The system-level capital to risk-weighted assets ratio (CRAR) may come down from 13.5 percent to 12.8 percent during the period".

Referring to the 11 state-owned banks under its prompt corrective action framework (PCA), the RBI said that they may experience "a worsening of their GNPA ratio from 21 per cent in March 2018 to 22.3 percent by this fiscal-end".

Ominously, the RBI added that six of these banks are likely to experience capital shortfall relative to the required minimum Capital to Risk (Weighted) Assets Ratio (CRAR) of 9 per cent.

To inform you all, the 11 banks under the PCA framework are IDBI Bank, UCO Bank, Central Bank of India, Bank of India, Indian Overseas Bank, Dena Bank, Oriental Bank of Commerce, Bank of Maharashtra, United Bank of India, Corporation Bank and Allahabad Bank.

"The capital augmentation plan announced by the government will go a long way in addressing the potential capital shortfall, while also playing a catalytic role in credit growth at healthier banks," it added. Former Finance Minister Arun Jaitley had previously announced a Rs 2.11-lakh crore recapitalisation plan for PSBs, of which Rs 90,000 crore was reportedly infused in the last fiscal.

The FSR (Financial Stability Report) also talked about the growing trend of bank frauds - both in terms of quantum and reported incidents - in detail. The report revealed that in terms of the relative share of frauds [of over Rs 1 lakh], PSBs have a disproportionate share - over 85 per cent - significantly exceeding their relative business share. "A sharper rate of growth observed in total number of frauds in 2017-18, which is driven by a significant jump in card/internet banking related frauds" it added.

The report further highlighted that large borrowers accounted for 54.8 per cent of gross advances and 85.6 percent of GNPAs. The good news is that according to the RBI, "the share of large borrowers in SCBs' total loan portfolios as well as their share in GNPAs declined marginally between September 2017 and March 2018."

Furthermore, the GNPA ratio in the industry sector rose from 19.4 per cent to 22.8 percent between last September and March 2018 whereas stressed advances ratio increased from 23.9 percent to 24.8 percent. "The results of the stress tests show that among the considered sectors, the most severe shock to the power sector will cause the banking system GNPAs to rise by about 68 bps [Unit of measure used in finance. One Basis Point or bps is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form]" said the report, adding, "The textile and the engineering sectors, though small in terms of total advances to that sector as compared to the infrastructure sector, also exhibited considerable transmission of stress to the banking sector." Similarly, GNPAs for housing finance assets have gone up from 1.28 per cent in March 2017 to 1.51 per cent as of March 2018.

This is not the first time that the central bank has put the spotlight on NPAs in the housing sector. Earlier this month, while announcing the 25 per cent hike in the home loan limits for priority sector lending, the RBI had said that the level of NPAs for the ticket size of up to Rs 2 lakh "has been high, and is rising briskly". So it advised banks to strengthen their screening and follow up in respect of lending to this segment in particular.

However NPA can be controlled by fine tune monitoring. NPA can be checked if the credit growth is quite reasonable say around 15% and the recovery efforts are good. But if the growth goes below 10% (as for the last 2 years it has been in single digit 9%) and the economic recovery is not complete as the recovery is also slow the cash flow of the economy reduces. This is the reason that there will be more NPA in the coming quarters.

Kindly bear in mind that it doesn’t matter whether GDP growth rate is 7.4%, or 7.5% or 7.6% as even if it is 7% it is quite robust if we look at the global scenario. I think recovery is likely to be there in overall scenario in the second half rather than the first half of this financial year. New funding for the projects have been announced by the govt as alternative sources of finance. The challenging for the govt is as Moody’s says “old bad debts of banks the present govt has inherited” and they are looking at it by creating this stable operating environment. So the banks have new finance with old bad debts – both of which have to be managed and administered by the govt. Banker are finding it difficult to sell the companies or finding new promoters. Financing further is not a big issue but yes refinancing or the capital issues are there but banks are capable of raising that much of fund on a yearly basis partly govt helping them and partly by raising bond and debentures to meet up their credit needs. That is not the issue but reviving old projects especially the big projects that have become NPAs is a big problem and it is very challenging as to from where to bring the money. It cannot be revived without the help of may be the govt or may be the promoters easily available. Let me say promoters from abroad are not easily coming into. That is the challenge. But yes finding ways to this challenge would lead the country to move things faster for fruitful solution. It is also time to hold the banks as well as the govt accountable for their actions so that funds are sanctioned to the deserving projects only. Sometime such witch-hunting is also required.