A report published in the Indian Express today flagged the alarming increase of bad loans, or non-performing assets (NPAs), of India’s public sector banks. Gross NPAs of 24 state-owned banks stood at Rs 6,14,872 crore in December, 2016, registering an increase of 56.4 per cent over the last 12 months. Furthermore, gross NPA ratios (ratio of bad loans to total loans) for these banks climbed from 7.16 per cent in December 2015 to 11 per cent in December 2016. Worryingly, the increase in gross NPA ratio in 2015-16 has quickened over the last three years – in December 2014, it was 5.09 per cent and in December 2013, the number was 4.61 per cent.
Economist Surjit Bhalla told Newslaundry that the banks’ bad loan problem “isn’t getting worse”. He felt that the steps taken by the Reserve Bank of India (RBI) to combat the problem have been counter-productive. “The RBI has kept [interest] rates steady, bond yields have risen and that makes the NPA problem worse, not better,” he said.
Author and columnist Vivek Kaul felt that the surge in NPAs can be explained by the banks’ initial reluctance to recognise bad loans. “Between 2011 and 2014, many of the bad loans of these public sector banks were not recognised as bad loans, which basically means they used to restructure these loans.” While this “postponed the crisis”, now with “bad loans being recognised as bad loans”, the rise in NPAs is “not surprising”, said Kaul. He directed attention to the NPA problems of private banks as well. “If you look at the numbers of Axis Bank and ICICI Bank – two of the three biggest private banks – they’re not really encouraging,” he said. “That is something that wasn’t really in the picture three years back.”
According to the IE report, NPAs of private banks stand at Rs 82,537 crore.
To combat the problem, Bhalla has advocated the creation of a “bad bank” (a newly-created bank to which all the bad loans will be moved and which will be responsible for their recovery from the defaulters). The idea has been on the policy table for some time and has worked successfully for other economies, he said. Slashing of interest rates and growth of confidence in the economy would help alleviate the bad loans problem, he added. Kaul, however, has been sceptical about the “bad bank” idea, writing that “going about selling their [big borrowers] assets in order to recover the loans will not be easy for the bad bank. These groups have access to some of the best legal brains in the country. They are also close to the politicians”.
While economists are at odds with each other about how to solve the problem, its scale has acquired mammoth proportions. So much so, that the ever-ballooning NPAs now dwarf the budgetary allocations for several crucial sectors and welfare schemes.
For a comparison, consider this: the combined allocation for the Mahatma Gandhi National Rural Employment Guarantee Scheme (Rs 48,000 crore), for the welfare of Scheduled Caste and Scheduled Tribes across all ministries (84,313 crore), for the welfare of women (Rs 1,13,327 crore) and for rural development (Rs 1,28,560) in the 2017-18 Union Budget is Rs 3,74,200 crore. That is a little more than half (60 per cent) of public sector NPAs (graph 1). Also, if one adds up the funds earmarked for defence spending (Rs 2,74,114 crore, excluding pensions) and development of transport infrastructure (Rs 2,41,387 crore) in 2017-18, the sum (Rs 5,15,501 crore) still falls short of the NPAs by nearly one lakh crore rupees (see graph 2). Moreover, the total budgetary allocation for health and education sectors (Rs 1,30,215 crore) is merely one-fifth (or 21 per cent) of the NPAs of state owned banks (graph 3).
The NPAs are expected to get worse over the next two quarters as the impact of demonetisation takes its toll on small and medium industries, the IE report notes. If this turns out to be true, the banks will be in even more serious trouble than they are now.