Bad assets keep banks at bay

Last month RBI in its Financial Stability Report has clearly indicated that the gross non performing asset (NPA) ratio of all scheduled commercial banks may escalate from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline set-up. It further added that the ache may grow further if the macroeconomic environment goes downhill and in that case the ratio may shoot up to 14.7 per cent.

Pix by Amit K Sikder
In my last article on banking ‘Nim Bullies Bank’s Kismet’ I remained critical about the loath stance of government on Insolvency and Bankruptcy Code (IBC), which worked well enough in countering the NPA concern of banks, as a measure to cushion the business environment on the onset of pandemic. The highly dormant demand side of the economy can never bode well to the revitalised supply front. Among all reasons the demand side of the economy always play a very decisive role on producer’s front to predict about their investment decisions and capacity to cover up the loans.
NPA is a long standing issue with banks. Post 1991, I mean the liberalisation phase, banks started to realize an abrupt accumulation of bad loans in its balance sheet as bit more intervention of externalities left manufacturers at loggerhead in regard of price fluctuations of commodities in overseas market.           

              GDP Growth Rate
Year         Growth (%)      Annual Change
2009            7.86                       4.78%
2008            3.09                      -4.57%
2007            7.66                      -0.40%
2006            8.06                       0.14%
2005            7.92                       0.00%
2004            7.92                       0.06%
2003            7.86                       4.06%
2002            3.80                     -1.02%

Data Source: Macrotrends
The magnificent GDP growth figure during fiscals 2006-’07 and 2007-’08 become a reason of higher volume of loan advances by banks. But an untoward global financial crisis of 2008 stagnated macros alarmingly to a low and which reflected to only a meagre 3.09 per cent of GDP growth.  And then the whole situation left corporations in lurch in terms of their repayment capabilities which reflected severely to the NPA figure of banks. So for long, NPA has been an unavoidable pain with the banking system.
Now to cope with the pandemic condition and to keep the economic activity alive the government has roped in on moratorium (EMI holiday) morale which altogether pushing banks to doldrums. According to the study of SBI research wing private lenders have 40 per cent (Rs 14.42 lakh crore) of credit under moratorium and Public Sector Banks (PSBs) have 41 per cent. Surprisingly 70 per cent of loan book for Small Finance Banks (SFBs) worth Rs 66,443 crore came under the moratorium out of total outstanding credit of Rs 94,919 crore. And the study also indicated about the true picture of NPA numbers, which currently in decline, would surface after second quarter of FY21 when the moratorium relief is poised to end.  Recently banks are very much vocal about not extending moratorium but changing NPA period from 90 to 180 days. In this period of uncertainty we are not sure about the normalcy when to come. So it could be a better judgement to go for a classification on industry so as to pick out those from the group who are not exactly in condition to have the moratorium relief. It will surely help banks to restore the lending capacity as well as counter the concern of interest payment.
Bad loans with a limit of approx 3 per cent is considered manageable. But compared with other BRICS members India stands at a very poor position with NPAs approximately at 9.85 per cent. Whereas NPAs figure of other members hover around 3 per cent with China only have 1.75 per cent.
Today the RBI in its policy announcement did not extend the moratorium rather specified the provision of loan restructuring which has made a good passage for banks and in near future hopefully could produce a better result.


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