Can banking recover?

Can banking recover?

Context:

• The Reserve Bank of India’s (RBI’s) attempt to purge the banking system of bad loans has begun to resemble the spring-cleaning of a long-neglected kitchen cupboard.

NPA:

• Indian banks recognise a loan as an NPA if its interest or principal repayments are overdue for more than 90 days.

Statistics of Gross NPA:

• Gross NPAs of Indian banks, after staying below the Rs. 1 lakh-crore mark between FY06 and FY11, began to gallop from FY12.
• Jumping to Rs. 1.4 lakh crore in March 2012, gross NPAs proceeded to rise almost six fold over the next five years to Rs. 7.9 lakh crore by March 2017.
• In March 2017, they held Rs. 6.8 lakh crore of the Rs. 7.9 lakh crore bad loans; private sector banks held Rs. 91,900 crore and foreign banks the rest.

Present situation:

• Persisting losses pose a threat to continued operations for a bank because they eat into its capital buffers.
• RBI can stop worrying about capital adequacy, if only the gross NPA ratios of Indian banks showed signs of peaking out.
• The higher ‘stressed advances’ ratios of Indian banks hint at more bad news to come.
• While the gross NPA ratios of banks were at 10.2% as of September 2017, their ‘stressed assets’ were higher at 12.2%.
• While the gross NPAs of Indian banks reflect overdue loans recognised in their books, there’s a whole bunch of dubious loans outside these, known as ‘stressed assets’.

Way ahead:

• As the Economic Survey noted, resurrecting Indian banks requires four Rs — recognition, resolution, recapitalisation and reforms.
• It is also important that newer bank loans given out in the last three years display good behaviour.
• But provisioning and losses from these NPAs are expected to stretch on for the next year or two.
• Depositors can take comfort from the fact that the capital adequacy problem has been addressed by the Centre’s mega recapitalisation package for public sector banks.