Indian Banks and the towering NPA problem
The Indian banking industry has been in the news recently for it sky rocketing stressed debt or Non Performing Assets (NPA) which has reached alarming proportions i.e. approx. Rs 7 lakh crores or Rs 7 trillion. To be precise a loan/advance which is overdue in terms or principal and/or interest for a period of 90 days is called an NPA.
RBI has identified the ‘12 bad boys of NPA’s’ and together they account for a whopping 25% of the total NPA’s. Bhushan Steel tops the list with a mindboggling Rs 44478 crores. The other prominent names amongst them are Essar Steel, Electrosteel Steel Lanco Infratech, Alok Industries, Jyoti Structures, Amtek Auto etc.
However it was primarily because of the flamboyant Chairman of United Breweries and Kingfisher Airlines, Mr. Vijay Mallya that the NPA issue came into the limelight. Mr. Mallya owes approximately Rs 9000 crores to the Indian banking industry. He is absconding since March 2016 and is currently in the UK. He still remains the industry’s poster boy.
An NPA affects a bank’s profitability because it has to set aside from its profits in order to make a provision for a loss in case of default. Thus bottom-lines of banks take a beating. Moreover as loans given form the asset base of the banks, such an asset base is eroded because of NPA’s.
The main cause of such high NPA’s is the 40% Priority Sector Lending Norm into sectors like agriculture, small scale industries, micro credit, education, housing, renewable energy, social infrastructure etc where lending risk is high. Also partly responsible are factors like-political pressure, mismanagement of funds, and competition amongst banks to fulfill business targets which have led to reckless lending in the past causing the NPA problem to balloon.
The recent farm loan waiver in states of UP, Maharashtra, Punjab and Karnataka also spread a wrong message and undermine credit discipline thereby encouraging willful defaulters. This only increases the problem in the future.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) was enacted to help banks recover their dues and auction property of defaulting companies without approaching the Court; but it has been criticized for being too draconian.
Recent steps taken by the Govt. are:
- March 31 2017 deadline to clean up books and address NPA’s
- Insolvency and Bankruptcy Code 2016 for consolidation of existing laws, implementation of reconstruction plans and speedy liquidation.
- The Banking Regulation (Amendment) Bill 2017 for amending the Banking Regulation Act 1949 to give RBI more powers and directly intervene in the settlement of bad loans.
Despite this new challenges still remain:
Institute of Chartered Accountants of India has called for more stringent provisioning norms (setting aside of profits to cover lending risk) from the next fiscal year i.e.2018
Also coming up soon by March 2019 is the requirement for banks to be Basel III (international banking regulations) compliant under which banks would have to maintain a higher total capital ratio of 11.5% to cover NPA risk.
It looks like a rather tough road ahead for the banking industry….
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http://www.mca.gov.in/MinistryV2/insolvency+and+bankruptcy+code.html
