Dr Ashwani Mahajan
The Reserve Bank’s latest report has stated that Indian banks’ Non Performing Assets (NPAs) have reached 4.45 percent in the quarter ending in March, 2015. NPAs of banks are assets of the banks, which do not generate regular income, meaning thereby those loans, whose repayment of principal and interest is not being received. Experts believe that in reality, such loans whose repayment is doubtful, are much more than 4.45 percent. Usually when borrowers find it difficult to repay principal and interest, banks go for restructuring of loans and banks extend the duration for repayment of principal and interest. According to the data, these restructured loans are nearly 5.9 percent of total loans. Therefore bad loans of banks are actually not just 4.45 percent loans classified as NPAs, rather they are NPAs plus restructured loans, that is, 10.35 percent loans.
Banks in crisis
It may not be appropriate to name any one, or set of reasons for the present crisis in Indian banking system. However, it would not be out of place to mention that when many of the big economies of the world, including USA and European economies were in trouble and many of giant financial institutions of USA and Europe were either bankrupt or were into deep crisis, Indian banking system exhibited extra ordinary stability. At that time Indian policy makers were found claiming that financial regulatory system in India has been one of the best in the world.
Today banking system of many of the economies in Europe continue to face problems, and banks there have been struggling with high NPAs. For example NPAs in Cyprus and Greece are 38 per cent and 32 percent respectively. However, in India problem ridden debts ratio is more than10 percent, it is somewhat near to Portugal and Spain, where NPAs are10.8 per cent and 9.4 per cent respectively.
Troubled Waters
In the financial year ending in March 2015, three out of every five nationalised banks have indicated towards rising NPAs. Whereas for nationalised banks NPAs and restructured loans combined together constituted 10.4 percent of the total loans in December 2014, this percentage reached nearly 13 percent by March 2015; though overall ratio of bad loans for all Indian banks is 10.35 percent. Rising ratio of bad loans, despite 10 percent growth in bank lending, indicates at deteriorating health of Indian banks.
Corporate Bad Loans
Due to gross economic mismanagement, scams and worst crony capitalism, there has been a significant increase in the NPAs in case of corporate loans. Slowdown in the economy worsened the situation for corporate loans. It is notable that in public sector banks total amount of restructured corporate loans stood at 14.2 lakh crores of rupees, whereas all other restructure loans were 24 lakh crores of rupees. According to a report published by All India Bank Officers Association, total amount of wilful default in case of 406 corporate borrowers was rupees 70000 crores. Such a big amount of wilful default indicates at economic mismanagement and crony capitalism.
Scams resulted in generation of huge black money, which was easily routed into real estate. Prices of real estate increased tremendously and multiplied by 3 to 5 times in metro cities in a short span of less than three years. Situation was not much different in other cities too. Later on when real estate prices declined, money flow got disturbed and people were not able to repay their loans. On the other hand, gross mismanagement of the economy also led to fast raising inflation, which compelled Reserve Bank of India (RBI) to revise repo rate and reverse repo rate upward, number of times, in a short period of 30 months; such that repo rate which stood at 5 percent in 2010, increased to 8.5 percent by 2012. High interest rate also complicated the problem of default in repayment of principal and interest, as EMI increased not only for the new loans, but also for the loans raised earlier.
Economy, especially manufacturing sector was at its worst; as rate of growth of manufacturing sector which was 15.6 percent in 2007-08, reached zero or even negative in years 2011-12, 2012-13 and 2013-14. This implies that industrial production had now started declining. This also led to the default by big and small industries.
Scenario can be changed
No doubt that due to the problems faced by the economy, not only NPAs of the banking system were rising, banks were also forced to restructure their difficult loans. But this is also true that this crisis of banking system is not for the first time. Fourteen years ago in 2001 similar situation had arisen; however by the efforts made by the then Vajpayee government, economy picked up and problem of NPAs was automatically solved. The present Government is perhaps making efforts in the right direction and it is trying to control inflation, promote manufacturing and improve transparency in Government functioning to control corruption. If the efforts of the Government fructify, confidence of the economy can be revived; inflation can be controlled, interest rate can be reduce (reducing the pressure on EMI) and can thus improve the repayment of principal and interest.
Revival in manufacturing can improve the condition of industry (both big and small), which can help them repay their loans more promptly. In the last one year, there is no news of any big scam, which indicates at better transparency in government functioning. Big corporate are also aware that they would also not be spared in case of any wrong doing. This fear can help check willful defaults and improve repayment performance. Therefore, instead of worrying about the NPAs as such, there is a need to attack the causes of rising NPAs; scenario can definitely be changed.
(The author is Associate Professor, PGDAV College, University of Delhi).
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