How bad are India’s Bad Loans: NPA Crisis?

Context:

The Prime Minister’s Office has called a meeting of senior officials of the ministries of finance and corporate affairs recently to review the progress in resolution of non-performing assets (NPAs) in the light of recent action taken by the Reserve Bank on stressed assets.

Background:

• India’s public sector banks and leading corporate have too much debt on their balance sheets; this keeps them from making fresh investment.
• The government is amending the Banking Regulation Act, 1949, which is expected to invest banks with some freedom in resolving bad loans without inviting the prosecutorial gaze of central investigative agencies.

Know about Amendment of banking sector regulations act

Know about Insolvency and bankruptcy code

Current NPA issues in India

• The internal advisory committee (IAC) of the Reserve Bank of India (RBI) had recently identified 12 accounts for insolvency proceedings with each of them having over Rs 5,000 crore of outstanding loans, accounting for 25 percent of total NPAs of banks.
• According to RBI, these 12 accounts would qualify for immediate reference under the Insolvency and Bankruptcy Code (IBC).
• India’s banking sector is saddled with NPAs or bad loans amounting to Rs 8 lakh crore, of which around Rs 6 lakh crore is accounted for by the state-owned banks alone.
• The total amount for gross non-performing assets (NPA) as on March was estimated to 11 Lakh crore
• Any missed installment not paid to the bank until the due date is a bad loan. If this further extends beyond 90 days, it is termed as Non-performing asset or (NPA).
• Appallingly, the 12 accounts identified by the advisory committee contributed to about 78 Lakh Crore.

Why so much of bad loans?

• At the outset, it has to be admitted that no bank can have zero NPA.
• One of the primary reasons for NPA could be that the lending decision was, an initio, incorrect.
• Another factor that can contribute to the low level of expertise in many big public sector banks is the constant rotation of duties among officers and the apparent lack of training in lending principles for the loan officers
• If the public sector has to compete in the fierce financial markets, they have to create and nurture a good cadre of officers in various disciplines.

What is NPA and it’s mechanism

Current developments on NPA:

• According to the Reserve Bank of India’s latest “Financial Stability Report”,Gross Non-Performing assets (NPAs) rose from 9.2% in September 2016 to 9.6% in March 2017.
• Stress tests conducted by the RBI indicate that this number could rise to 10.2% under the baseline scenario.
• Return on assets is negative.
• The net non-performing advances (NNPA) ratio marginally increased to 5.5% in March 2017 from 5.4% in September 2016.
• The RBI in its Financial Stability Report (FSR) highlighted that stressed advances ratio declined from 12.3 % to 12% due to fall in restructured standard advances.
• The category 2 of special mention accounts (SMA-2) as percentage of gross advances also declined across bank groups.
• The report also said that bank’s share in the flow of credit, which was around 50% in 2015-16 declined sharply to 38% in 2016-17.

Steps taken by RBI:

• Fifty-six per cent of the loans given out by Indian banks have gone to large borrowers—but they account for a massive 86% of gross NPAs.
• Bad loans are concentrated in a few firms in a few sectors such as telecommunications, power, infrastructure and steel.
• The RBI has already identified 12 big accounts for quick resolution, under the powers given to it by the recent presidential ordinance.
• These 12 accounts are the source of a full quarter of the total NPAs of the banking system.
• Lenders have been instructed by their regulator to use the provisions of the new Insolvency and Bankruptcy Code to file insolvency proceedings against companies.

Suggestions:

• Banks need to be more conventional in yielding loans to sectors that have a history of being found as contributors in NPAs.
• The loan sanctioning process of banks needs to be harsher and well beyond the conventional practices of analysis of financial statements and history of promoters.
• A suitable agenda to attract and reassure quality professionals to join the discipline of insolvency professionals is vital.
• Any plan to alleviate the current scenario especially relating to the Debt recovery tribunals must be given urgency, to ease the burden on NCLT
• If the public sector has to compete in the fierce financial markets, they have to create and nurture a good cadre of officers in various disciplines.
• As per the RBI directive, banks will now have to agree to a common approach for restructuring or recovery of each non-performing loan (NPL).
• The common approach will be the one adopted by the lead bank, along with a few more banks so as to meet the thresholds of 60% of lenders by value and 50% by number.
• This approach assumes that the interests of all banks need to be aligned with or subsumed within the interest of the lead bank.

Way forward:

• Full information about unit, industry, its financial stake, management etc. should be collected.
• Proper evaluation of the credit proposals will help the banks in detecting unviable projects in the first instance.
• There is an urgent need to develop specialized skills in the area of appraisal, monitoring and recovery to ensure the quality of credit portfolio.
• Banks should be equipped with latest credit risk management techniques to protect the bank funds and minimize insolvency issues.
• Banks should explore the possibilities to develop credit derivative markets to avoid these risks.
• Timely follow up is the key to keep the quality of assets intact and enables the bank to recover the interest/installments in time.
• Selection of right borrowers, viable economic activity, adequate finance and timely disbursement, end use of funds and timely recovery of loans should be the focus areas so as to prevent or minimize the incidence of fresh NPAs.