SBI has reported gross NPAs at 5.1 percent compared with 4.15 percent in the preceding quarter, while another bank Union Bank of India reported 7.05 percent against 6.12 percent on a quarterly basis. Higher provisions associated with increase in bad loans pushed down the net income of by substantial margin for both banks.
Even though it might cause pain in the immediate future, it’s good that banks are forthcoming in recognising bad loans, since this can help addressing the hidden rot in their books. What RBI governor Raghuram Rajan wants banks to do is state the problem upfront, and not postpone it.
Hidden NPAs of banks have been a bigger concern for the regulator than the declared ones, since no one had actual estimate of the extent of bad loans in the banking system.
"Deep surgery needed to clean up balance sheets; NPA recognition is anaesthetic to do surgery," said Rajan.
To date, the reported gross NPAs of Indian banks stand at around Rs 3 lakh crore, while restructured assets (under CDR and bilateral channels) together would constitute almost double amount. On the whole, the total stressed assets in the banking system would be in 10-12 percent of the total bank loans given for banks. But, this isn’t all.
More skeletons will tumble out of the closet when banks fully declare the NPAs in their books. The earlier leeway banks used to enjoy to push bad assets to restructured loan category is no longer available now since the RBI has asked banks to treat fresh restructured loans at par with bad loans.
While it is a good sign that banks are finally willing to acknowledge the problem, it doesn’t mean the issue is resolved. How to repair such a huge stock of bad assets is a billion dollar question before the industry, the government and the regulator. Any chances of recovery depend on the revival in the economy itself and how effectively the banking system is equipped with tools to take on crony promoters, who have been using the banking system to their advantage. The creation of the proposed bankruptcy code can help since this will provide ammunition to banks to deal with future case of defaults.
But, dealing with the existing chunk of defaulters, many of them are wilful defaulters (promoters who have the ability to pay back but wouldn’t do so) would require tremendous political will and effective judicial mechanism to deal with disputes between banks and defaulters. The delay in dealing with disputes between banks and corporates significantly impacts the value of the underlying asset and by the time banks manage to initiate recovery process, there wouldn’t be much to recover. A perfect example is the Kingfisher case, where a group of 19 large banks are still struggling to make any meaningful progress in the recovery of Rs 7,000 crore loan for liquor-baron Vijay Mallya, who is fighting lenders in the court.
One must give credit to RBI governor Rajan for calling a spade a spade and putting an end to the practice of banks masquerading NPAs as good loans by recasting them.