Editorial: Heartening recovery
As per the central bank, the gross bad loan ratio of banks has reached a 12-year low
Amid gloomy economic scenarios, particularly on employment and inflation fronts, here is something to cheer about: a steadily declining non-performing assets (NPAs) of Indian banks. The Reserve Bank of India’s latest Financial Stability Report (FSR) says the gross NPA ratio of scheduled commercial banks fell to 2.8%, the lowest in recent years, and the net NPA ratio decreased to 0.6% at the end of March this year. As per the central bank, the gross bad loan ratio of banks has reached a 12-year low. This significant drop indicates that banks are managing their bad loans in a better way, reducing the risks of defaults. This is a welcome turnaround, largely facilitated by a conducive policy environment and the effective implementation of the Insolvency and Bankruptcy Code (IBC). The NPAs, a consequence of reckless lending by banks, has been a huge legacy problem in India. It erodes faith in regulatory mechanisms and drags down the economy. The IBC, legislated in 2016, led to the establishment of a legal mechanism to help banks restart corporate lending and get the economy back on track. The RBI’s war against NPAs began in January 2015 when it issued rules for early recognition of stressed assets in the system and their punitive provisioning. The banking sector returned to profitability in the first half of 2019-20 as recapitalisation helped public sector banks in shoring up their capital ratios.
It is heartening that the improvement has been across the board with bad loans declining in both public and private sector banks, and in major sectors of the economy. Alongside, there has also been a steady improvement across key financial parameters of the corporate sector. As per the report, private non-financial companies have managed to bring down their debt to equity ratios further, and have seen an improvement in their debt servicing capacity. Non-performing assets are an impediment to the long-term growth and stability of the Indian banking sector; their impact on the overall health of the economy cannot be overemphasised. Since its enactment, the IBC has helped many banks and financial lenders realise their dues by streamlining the process of resolving insolvency cases. This is very important for the world’s fastest-growing major economy, which aims to become the go-to destination for global investors. Doubts and apprehensions about India’s legal and regulatory framework can be detrimental to the confidence of investors. The RBI has noted that with healthier balance sheets, banks and financial institutions are actively supporting economic activities through consistent credit expansion. These observations should be reassuring for domestic investors, even as there is room for improvement in terms of making banks more robust and profitable. Every customer is concerned about the safety of his or her deposits and investments; the banks’ ability to handle financial shocks and minimise risks can make a huge difference to their fiscal health.
