Economic Highlights
New
Delhi, 5 August 2011
Rising NPAs
SEVERE MELTDOWN IMMINENT
By Shivaji Sarkar
Rising prices and the Reserve Bank’s
insistence on repeating its same prescription i.e. raising interest rates, are shockingly
telling on the health of the banks. As a result, bad loans – non-performing
assets (NPAs) – are growing phenomenally. And, if this trend persists, it would
be no surprise to see a repeat of Lehman-type crash – not only of the banks but
of the entire economy. Only the locale this time would be India.
In April-June quarter, the gross
NPAs rose by almost Rs 5,000 crore. In January-March quarter it stood at Rs
60,685 crore and rose to Rs 65,318 crore by June-end. This is said to be the
highest rise of bad loans in the past five years.
Loud alarm bells are ringing in the
banking sector. Today, the NPA is one of the biggest
problems that the Indian banks are facing. If not properly managed it would greatly
hamper the business of banks. Worse, if the concept of NPAs is taken very
lightly it would be terribly dangerous for the Indian banking sector and may lead
to a severe fund crunch.
Till 2008-09, real estate & the housing segment contributed widely towards
the NPA. As the economy started heating up other sectors too started
defaulting. Thus, the challenges before the banks today are clearly
the rising NPAs in the retail sector, propelled by high consumerism and low
moral standards.
In the recent
past, the corporate sector had shown improvement insofar as repayments were
concerned. In fact, till a decade ago, as per a RBI study they were known for their
willful default and diversion of funds. Once again there is high default in
corporate repayment owing to the pinch of high interest rates.
It is not that all
payments are unrecoverable. But as the amounts are mounting, banks would need
to consider restructuring loans – euphemism for acceptance of delay in
repayment. They have no other option. As the economy slows down, less business
is generated leading to a severe cash crunch. So there is a different jargon to
understand the actual level of bad loans – largely doubtful assets – and it is
called net NPA. It has risen by almost Rs 3,000 crore in the quarter ending
June-- from Rs 24,914 crore in the previous quarter to Rs 27,311 crore. It
signifies a whopping increase of 9.62 per cent.
Of late, one of
the major defaulters has been the small and medium enterprise (SME)
segment. The Bank of India CMD, A K
Mishra has said that since the interest rates are high, many companies
particularly the SMEs are finding it difficult to service their loans.
Currently, India has 96 scheduled commercial banks (SCBs) - 27 public
sector banks (that is with the Government of India holding a stake), 31 private
banks (these do not have any Government stake; they may be publicly listed and
traded on stock exchange) and 38 foreign banks. All have a combined network of
over 53,000 branches and 17,000 ATMs. According to a rating agency report of ICRA
Limited, the public sector
banks hold over 75 per cent of total
assets of the banking industry, with the private and foreign banks holding 18.2
per cent and 6.5 per cent respectively.
Overall two out of every three banks are seeing a rise in their NPAs. The
public sector banks naturally are the worst-hit. But some private sector banks,
including the IDBI Bank, are also not free from the malaise.
The percentage
change in gross NPA to gross advances ratio & net NPA to net advances ratio
over the years, states that public sector banks make more provisions in gross
NPA & gross advances as compared to private and foreign banks. Public
sector bank managers blame this on RBI guidelines. Earlier, NPAs were
calculated manually. Since many banks used to conceal facts, the RBI issued
instructions to decide it on the basis of computer system generated
“recognition”. Many top bank officials say it inflates the reality. Now the
system is based on 90 per cent information. By September it would cover 100 per
cent. Technically, the September figures would be much higher.
There is truth in
the assumption because the computer system does not recognise whether the delay
is by a day or several months. So, the bankers’ assumption that this inflates
the gross NPAs may not be incorrect. But when it comes to net NPAs, they do not
answer the queries. In short, they agree that the problem is aggravating.
As of now, the bane
of the Indian banking system is the high interest regime. Even the RBI acknowledges
it. But its insistence on containing inflation in a hackneyed manner through
monetary mechanism is causing serious problems. The Central bank’s prescription
is further adding to inflation and also slowing down all other industrial
activities. At a time when the country has the capability to compete in the global
arena, particularly as western economies slow down, the RBI’s too cautious an
approach is putting on the brakes.
Another fall-out
of high NPA, according to a study by NR Institute of Business Management, is
burdening honest depositors, creditors and other users with high unwarranted
fees. This makes banking expensive and ultimately again adds to inflationary
pressure. Besides, there is no guarantee that the NPAs would come down. In
reality, banks are subsidising defaulters at the cost of others. Though this may
help them in the short run, in the long-run it gives no insurance for a severe
breakdown.
Importantly, the banks
need to bring down their fees to encourage people to use their services more. Today,
many organisations are looking for alternative routes for payments rather than
opting for bank drafts, as these have become expensive instruments. However, if
the fees are lowered, the banks would gain. Similarly, there are many other services which
have become expensive and users are opting less for these. This has led to
asset quality deterioration, a term that signifies a crunch of funds with the
banks.
Significantly, the
banks which are now saddled with high credit burden are anxiously awaiting a
relief from the RBI. They are expecting that as in 2009-10, in the event of the
US
and European economic crash, the RBI would allow them to restructure their
loans. That would technically relieve them of immediate gross NPA worries. But
that is not a solution for the rising net NPAs. It cannot be prevented unless
inflationary pressures come down and the people once again start flocking to
the market for buying goods, which would in turn help pick up industrial
production. However, let it be understood that if this does not happen, the
meltdown may impact and impact dreadfully. ---INFA
(Copyright,
India News and Feature Alliance)
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