Reflecting the pulse of the banking system, the Financial Stability Report-June 2018 released by the Reserve Bank of India (RBI) affirms the continuing rising trend of non-performing assets (NPAs). Close to 90% of such NPAs are concentrated in public sector banks (PSBs). Such scale of toxic assets has opened up intense debates among policymakers and intelligentsia for early resolution.
According to the report, the outlook of NPAs is no better. During severe stress situation, the gross NPAs of PSBs may escalate to 17.3% by March 2019 calling for greater attention to tackling the stressed assets. Gross NPAs reached 11.6% in March 2018, from 10.2% in September 2017.
But the net NPAs have gone up less steeply due to higher provisions. Impacted by the twin balance sheet malady, banks have been shifting focus to reduce exposure to large borrowers (with loans of Rs 5 crore or more) to stem NPAs. Consequently, the share of large borrowers to total bank credit declined from 58% in March 2016 to 54.8% in March 2018. Gross NPAs of such large corporate borrowers also reduced by 80 basis points to 85.6% by March 2018.
Impact of High NPAs
Based on high level of NPAs, negative return on assets (ROA) and depleting capital adequacy ratio (CAR), the RBI had to clamp Prompt Corrective Action (PCA) on 11 of the 21 PSBs with attendant restrictions in their functioning. The PCA is intended to restore their normal health by correcting weak areas. Meantime, implementation of the new framework for resolution of stressed assets for loans of Rs 2,000 crore and above from March 2018 and scrapping all forms of restructured assets have added to the pile of NPAs.
As a result, 19 of the 21 PSBs declared losses during FY18 due to loss of interest earnings on new NPAs and additional provisions made as per prudential norms. The provision coverage ratio of PSBs is pegged at 47.1% in FY18 as against 51% in the case of private peers. The CAR, another important parameter, is below the threshold in six PSBs where PCA is in force. Augmenting their capital base is necessary to enable them to continue to lend.
Going by the weaknesses of banks measured by the RBI, the banking stability indicator showed that deteriorating profitability as well as weak asset quality pose elevated risks. In the last 2-3 years, the PSBs have been working assiduously to enforce recovery using all available tools but the change in regulations and continued indifference of borrowers have added fresh NPAs. The mega fraud in PNB has only increased the woes and fractured the image of PSBs.
Ever since the Insolvency and Bankruptcy Code – 2016 came into force, the RBI has been guiding the PSBs to approach the National Company Law Tribunal (NCLT) for a time-bound and speedy resolution. Of the 701 cases admitted by the NCLT so far, only 176 could be closed and of these 22 have been resolved. Debt resolution through the IBC is stabilising and can pick up pace.
Bad Debt Menace
However, the collateral damage to the PSBs due to bad debt menace has been huge. Their credit growth has gone down in the last two years. Thus, more than the impact of NPAs, the low credit growth has threatened its market share. The share of PSBs in credit delivery decreased to 65% in FY18.
Having built a strong PSB infrastructure with focus on hinterland in the last five decades since nationalisation, it will be in the long-term interest of the economy not to allow dilution of role of PSBs, which have strong grassroots connect with entrepreneurs at the bottom of the pyramid who cannot access other sources of funds. Moreover, due to the burden of high cost of borrowings from the informal sector, their growth will be hampered. Faster and efficient dissemination of banking services in the interior regions is essential to meet the growth aspirations and sustained development of the economy.
At a time when the GST is set to bring more entrepreneurs into the formal sector, financial assistance to them can step up the economy. The role of the PSBs will, therefore, continue to be critical in expanding the rural economy.
Better Credit Culture
With the strenuous brick building done in past three years, the future incidence of NPAs will drastically come down and can create compatible credit culture. The qualitative transformation of credit origination and monitoring in banks will bring the needed change to improve borrower mindset.
Tools like formation of Public Credit Registry, widening the source of tracking credit history of borrowers and stabilisation of functions of Insolvency and Bankruptcy Board (IBBI) can create right systemic controls to improve quality of assets.
The more daunting challenge, therefore, is to reinforce sustainable credit culture by institutionalising superior governance structure in the banking ecosystem rather than allowing the PSBs to weaken further under the weight of bulging NPAs. The stakeholders should work towards tackling existing stock of NPAs with suitable mechanism akin to global practices once and for all. A social transformation is essential by institutionalising robust systemic controls and legal provisions, which can force delinquent borrowers from out of the financial orbit.
Bad loans have already caused irreparable damage to the PSBs. Now is the time to restore their sheen by weeding out dud assets from the portfolio by whatever method possible and restore their capacity to lend to productive sectors. It will be in the larger interest to protect the well-built PSB structure to enable them to continue to serve the teeming million.
(The author is Director, National Institute of Banking Studies and Corporate Management, Noida)