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.

Nim Bullies Bank’s Kismet

The lockdown phase hit the credit growth of banks abysmally with figure of a decadal low of 6.14 in 2019-20 fiscal. Here a slip in net interest margin (NIM) will render more pains to bank’s portfolio which is already in shock for long. During the lockdown time RBI in its monetary policy has chewed over policy rate cut so as to rejuvenate banks spasm on ground of deposit liabilities and fall in credit offtake. In the unlock phase the economy has started to gain ground bit slowly. But the concern of right demand boost is knocking firm’s dashboard hard.

Apart from all these hiccups in domestic front the ongoing conflict with China leapfrogs the crisis in many dimensions. The post-covid new normal is descending with a heavy depression over the manufacturing ground and count heavily on banking business. Banking is highly detrimental to economic growth apart from all other instruments. We have seen how the Indian banking sector showed resilience during the financial crisis in 2008. The prominence of public sector banks during that time has helped policy makers a lot to reap the best benefit as it facilitated the RBI on government’s behalf to exercise policies like high CRR, stringent credit policy and regulations of lending rates.

Pix by Amit K Sikder

Merger of Banks: Among the number of concerns taken in pursuit by policy planners to go for banks mergers most important was to curtail down the volume of bad loans in bank’s books. But the move did not count well in arresting the problems due to inapt judicial system and banks reluctance to write off bad loans as that require big losses. And altogether the merger initiatives have failed to arrest this structural bottleneck. Merger is not an option to unleash the burden of government’s development goals which over the years exerted pressure on PSU banks to extend loans which always did not make business at all.

IBC in Covid Air: IBC was mainly intended to bite the pile of bad assets of banks. Basically the Insolvency and Bankruptcy Code (IBC) became a law in 2016 and still existent in system. As of December 31, 190 companies was listed in the default code with a claims of Rs 3.52 trillion had been filed by creditors of which around 43.1% of claims has been recovered. But during 2015-16 fiscal only 10.3% of loans was recovered and it has established a genuine support in favour of effectiveness of the move. Now to alleviate the ruthless impact of Covid-19 the government has brought about some ramifications in terms of raising threshold limit for invoking insolvency to Rs 1 crore from the existing Rs 1 lakh to extend a comfort to mainly MSMEs which hit hard. This apart the government also have it in mind to rule out covid-19 related debt from the default category.

      Bearing all these in mind and expected slackening of credit growth banks have started to lower interest rates and eased requirements for retail customers in different format. So the relaxed IBC may bring forth the concern of surge in NIM figure of banks and could push the sector to a new low. It’s a grave concern for the economy and the government to streamline the ‘Atmanirbhar’ quotient in right direction. Here my simple suggestion goes for a bigger resolution in favour of more infusion of capital to banks which only could keep the hope of the economy alive.

(Ref: IBC impact mentioned here based on Mint study)