Notwithstanding the fact that non-performing assets (NPAs) of public sector banks were never handled seriously during the UPA regime, which only worsen the situation, the current NDA government at the Centre is making everything possible not only to insinuate economy from the horrible NPA figures but also to ensure that economy bounces back after having crossed all hurdles created during the UPA regime. One must note that the slowdown of credit growth in India is not the fallout of state-run banks attempting to resolve their massive NPAs or dud loans,
problems and pre-dates the recent efforts by banks to clean up their balance sheets.
From time to time we have a bunch of critics who claim that cleaning up the bad loan problem was what led to the slowing of credit by the public sector banks, which is not correct. The slowdown had started before the clean-up, probably as banks became aware of the magnitude of the problem. It was persistent pressure from the Centre that when the RBI found banks were reluctant to recognise problems, the Central bank decided not just to end forbearance but also to force them to clean up their balance sheets. The Asset Quality Review, initiated in 2015, was the first major exercise of this nature in India. Even today addressing the twin balance sheet problem remains the RBI’s top priority.
Experts feel that private investments won’t go up on account of an interest rate cut because the cost of credit is not the main reason for investments not happening in India. Weak credit growth and low private investment has been an ongoing problem for some time now. A study by industry lobby Assocham has said that private investments are unlikely to pick up before 2019 owing to low capacity utilisation and weak balance sheets. Corporate India is currently heavily over leveraged as a result of flush of investments made in the boom period preceeding the global economic slowdown caused by the 2008-09 US financial crisis. As India escaped the worst of the financial crisis, the flurry of investments continued.
The loans taken by the private sector account for a substantial part of the massive NPAs accumulated by state-run banks.By the Banking Regulation (Amendment) Bill passed by Parliament last month, the RBI has been given power to refer these cases to the Insolvency and Bankruptcy Board. The new law also has provisions empowering the RBI to issue directions to banks for resolution of stressed assets. The sectors most responsible for the accumulated NPAs are steel, power, textiles and infrastructure as RBI has identified 12 large loan defaulters who account for 25 per cent of the total NPAs. Action has already begun under the Insolvency and Bankruptcy Code against some of these defaulters, including Essar Steel, Bhushan Steel and Bhushan Power.
Crisil Ratings have estimated that the total amount of stressed loans, which includes NPAs and standard assets that are under pressure currently and could deteriorate into NPAs, to be at Rs 11.5 trillion or 14 per cent of the system. It is worth mentioning that assets under pressure comprise the not-yet-recognised bad loans, which are recognised as NPAs in one bank, but not in others, restructured standard accounts, and stressed assets structured under schemes such as the strategic debt restructuring, the 5/25 and the S4A. According to the agency, faster resolution of stressed accounts through the Insolvency and Bankruptcy Code and various structuring schemes, is critical to improving the asset quality of banks, which the Central government is ensuring with all seriousness. Banks have been told to focus on recoveries, which have been poor over in the past couple of years and the bulk of the reduction in gross NPAs has been because of higher write-offs.
(The writer is an independent commentator on socio-political and economic issues. Views expressed are his personal)