The NPA issue has now come to occupy centre-stage, with there being a clarion call to set things right.
The NPA issue has now come to occupy centre-stage, with there being a clarion call to set things right. There are two aspects to this. The first is the build-up and recognition of these NPAs and the second is their resolution. The focus, today, is more on the second part. The major challenge is that if these assets are to be disposed of, then someone has to put in money (in case of ARCs) and bankers have to be willing to operate without fear for selling cheap. Unfortunately, no one is willing to put money on the table, and bankers are not confident about neutral repercussions in the future.
One of the reasons for high NPAs is the practice of better recognition of these assets being pursued as they were swept under the carpet by being called restructured assets in the past. Curiously, when this was done, no one objected and such acts were justified as being necessary on account of projects failing due to extraneous conditions like policy impediments. But doesn’t this hold for almost all loans that turn bad when conditions turn adverse? How serious is this issue today?
To put it in global perspective, the accompanying table provides four major indicators for banking systems in 15 countries for the latest quarter of 2016 as presented by the IMF. The countries chosen are a blend of developed and developing nations to highlight these patterns. Countries in Africa and CIS have been excluded where numbers are extreme.
India is high up in this list with Italy, Portugal and Russia being above us. The number of 9.2% compares with Cameroon, Algeria, Bhutan, Armenia and Hungary which have ratios between 9-10%. This is not good news considering that we do claim we are one of the front-runners in growth and development in the world.
The second column gives data on the ratio of NPLs adjusted for provisions to capital, which is a better way of depicting NPLs in relation to capital. Here, too, we do not do well with 38% of capital being vulnerable to be wiped out on this score. Italy is disastrous, while Portugal comes close to India. Spain is quite high at 29% and Germany, surprisingly, with lower NPL ratio has 21% of capital being vulnerable to NPLs. This ratio is important as it captures the combination of NPA and capital adequacy as it indicates the adequacy of capital in the light of impaired assets.
The last two columns provide information on both return on assets and return on equity, where we are ranked 9th and 11th, respectively, and hence well below the median value. Providing for these NPLs does push down profits and gets reflected here.
Two thoughts come to mind. In India, the outstanding debt from the formal sector is around `130 lakh crore and includes banks, corporate debt market, ECBs, financial institutions and NBFCs. Banks account for around 60% with outstanding loans of `75 lakh crore. If one were to look at NPLs in other segments, the picture is stark. In case of FIs, it is less than 1/2%. For NBFCs, it varies between 3-5%, depending on whether they are deposit or non-deposit taking entities. For both corporate debt and ECBs, the numbers are almost negligible—though arguably only the better borrowers have access to these markets.
This means there is fundamentally something different in the systems of banks that led to the build-up of NPAs and that does not get replicated in other segments. Clearly, the credit systems need to be examined in detail to pinpoint where the fault lines lie. It would be a combination of the credit appraisal techniques and understanding, decision-taking, follow-up processes as well as the quality of borrowers as those which are not good would also have no other source of borrowing.
The second thought would call for debate. There are two parallel developments in the economy. First, we do take pride that ours is the fastest growing economy and has been for several years. The question is that as all growth has to be financed by the system, there is a chasm when one puts in the second part of the piece, which is bank NPAs. Is it that we have achieved high growth by being injudicious in lending—an allegation that is often made in China where banks have been pushing in funds to keep the wheels rolling at a fast pace?
This is interesting because, as the table shows, high NPAs normally go along with countries that are on a decline and have deep problems in the real sector. The euro crisis dented growth prospects of several nations which get reflected in these numbers. But the Indian case is unique because growth has been high with focus on infra creation (also the case in China) as well as capacity additions in industry in the face of easy availability of cheap funds. But it does appear that ever since the economy slowed down post FY14, the NPA issue has come to the fore with the same getting highlighted when RBI spoke of their recognition.
Given that such magnitude of NPLs has built up over years and not due to single quarter disturbances, we need to introspect. Has it been a case that we have fostered high investment and growth through reckless lending? We have heard of the rise and fall of the junk bond market where companies borrow at high rates as they carry commensurate risk. Is there a parallel in the banking sector? This is important to address because if we are working on a new path to growth where finance will still come from the banking sector, which will be equipped with more capital, it should not be a case of return to imprudent lending.
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