Reining in the NPAs

Insolvency and Bankruptcy Code and recapitalisation of PSBs might help but a wider systemic reform is needed to effectively address the problem

By Author  |  Published: 30th Dec 2017  12:01 amUpdated: 29th Dec 2017  7:47 pm

Reckless lending by banks over the years has created a huge mess in the form of non-performing assets (NPAs). A comprehensive structural reform alone offers a permanent solution to this legacy problem. With bad loans amounting to over Rs 9.50 lakh crore, India has now earned the dubious distinction of ranking fifth in the world among the nations with high NPAs, as per the latest research report by rating agency CARE. The banks in India started to recognise bad loans as NPAs only after former RBI Governor Raghuram Rajan introduced Asset Quality Recognition (AQR) norms that pushed the commercial banks to find out loan defaulters. This significant surge in the NPAs in the banking system, especially public sector banks, is a matter of serious concern. Bad loans not only erode faith in regulatory mechanism but also drag down the economy and vitiate the investment climate. The country’s bad loans have surged drastically in the last six years. The sharpest rise came in 2016 when bad loans shot up to 9.18%. Experts say that slower revenue growth and higher interest rates are the key reasons behind the increasing stressed assets. Within the emerging economies, China, Argentina, and Chile have low ratios ranging from 1% to 2%. The Financial Stability Report, released by the Reserve Bank of India last week, makes a disturbing reading as it sets out to highlight the extent of the crisis facing the banks and large business corporations. The gross NPAs in the banking system as a whole rose to 10.2% at the end of September, from 9.6% at the end of March.

The RBI has warned that the NPAs could continue to rise to as high as 11.1% of the total outstanding loans by September 2018. This means that the problem of NPAs is unlikely to be solved in the near term. The two recent initiatives taken by the Central government —Insolvency and Bankruptcy Code (IBC) and recapitalisation of public sector banks — might help in bringing the NPAs problem under control to some extent. The increase in credit growth also provides some hope. Despite some inherent inadequacies, the IBC, passed in May last year, is widely expected to check the menace of bad loans and infuse discipline among promoters. The Rs 2.11 lakh-crore front-loaded recapitalisation will help banks clean up their bad loans and step up lending to give a big push to medium and small enterprises. However, these measures alone may not be sufficient to tide over the crisis. A wider systemic reform is needed to effectively address the problem of unsustainable lending and to ensure that the future credit cycles will not stress the banking system.