Dr. Rumki Bandyopadhyay
Deputy Director International - Academic Affairs
Associate Professor - Amity Business School
The COVID 19 pandemic and the subsequent nationwide lockdown have majorly impacted the rise of bad loans. Banks witness this increase primarily because of corporate lenders including Essel Group, Essar Group, Coffee Day, Vodafone, Alitco, Omaxe, Peninsula Land, Karvy, Ruchi Soya, Prayagraj Power, RattanIndia Amravati and Coastal Energen (Business World, 2020; Live Mint, 2020; Financial Express, 2020).
The public sector banks may rise to 13.5 per cent from the present 12.7 percent in case of severe stress state of affairs. The increase is due to the vulnerable macroeconomic scenario and thus increasing the gross non-performing ratio to 9.9 percent while the private sector banks could witness an increase in gross NPAs to 5.4 percent from the present 3.9 percent while the foreign banks may rise to 4.2 percent from the current 2.9 percent. The sudden halt of the economy may further lead to deterioration of macroeconomic scenario and the outcome may still worsen (Economic Times, 2020; Live Mint 2020).
Indian banks are now saddled with highest levels of bad debts while globally the shock of Lehman Brothers paved the bank as bad banks. The lack of not able to provide lending facility to healthy companies is definitely a huge collateral damage. The situation is at standstill wherein banks and private sector both are stressed and rising to fallout of the banks vis-à-vis economy. There are cases wherein banks have spent the cash for projects which are not promising for instance, Formula One track that was abandoned after just three races. Regulators have allowed many industries to restructure their loan against writing off and the worst of it they even agreed on moratorium on interest payments.
Untill half a decade ago, this scenario was not as alarming as now. During 2014-15, RBI announced cleaning of balance sheets and thus band loans had to be declared. This also led to a scenario wherein banks increased provisions making a huge impact on the profitability. Infact, the stress of being bad banks in Indian scenario started very particularly during 2011. A large number of cases came into light though the economy was much stable during the phase of 2006-08, wherein the banks were chasing the promoters for providing loans. Typical unlike in the emerging world, the Indian banking system accounts 73 percent of the total bank assets coming from the Public Sector banks and the sad part of the regime was these public sector banks continued financing the promoters. However the question here is why RBI didn’t raise the red flag on the quality of the lending. It could have enforce and penalize for non-compliance (Financial Express, 2017; RBI, 2015).
Towards, the end of the year 2014 a small team of inspectors from RBI could investigate and come to a conclusion that the corporate had already taken the banks for a ride and the worst part of the story is all the big loans though officially was in good condition the fact was the opposite. Perhaps this action step of investigating would have taken on board much earlier, possibly the situation might not have got worsen at a stage where in the amount of the bad loans had a threefold increase from the year 2008 until the year end 2015. The increase seems to be a never ending finish line. Shock seems to be unending as the banks face a tough competition from fintech companies as well. To overcome this Banks came up with a compelling 4 stage strategy. Today, we witness PSU bank merger in a big way, this is infact the first step of the 4 step strategy, the mid sized and small banks including smaller private sector banks, small finance banks, RRBs, Co-Operative Banks that particularly provides lending facilities to the unorganized sector in rural and local areas. The fourth strategy will consists in grapping the digitalization boom wherein the digital service providers may directly or may connect through the banks in acting as their agents for delivering banking service. At this stage banks must rethink whether adapting powerful analytical tools or increase in the customer base will it be just sufficient to overcome the crises??
During this pandemic as a strategic approach RBI allowed banks to offer term loan with a three month moratorium and this period will not be classified as NPA. At the same time the NPA can now be classified if the repayments are overdue for more than 180 days from the present 90 days period. This will definitely bring some relieve and will not spike immediately. This will also bring in some relaxation to the lenders who are defaulters due to the loss of income at this vulnerable scenario. A relaxation of 20 percent in liquidity coverage ratio is also a welcome move by RBI wherein the banks in a staggered phase wise may increase to 100 percent upto April 2021. Further to this, a timeline of 300 days have been facilitated for those defaulters who could not meet within 210 days regime, an additional 20 percent provisioning may be done by the banks. This extension of timeline will largely benefit to the large lenders. Banks have to move a long way for bringing down NPA levels.
1. Business World (2020), Bad Loans And NPAs- What’s The Solution?, Retrieved from : http://www.businessworld.in/article/Bad-Loans-and-NPAs-What-s-the-Solution-/29-02-2020-185235/
2. Live Mint (2020), Indian banks may withstand next wave of bad loans, https://www.livemint.com/money/personal-finance/indian-banks-may-withstand-next-wave-of-bad-loans-11598285035748.html
3. Financial Express (2020), India heading for another NPA crisis? RBI predicts bad loans could be as high as 12.5% by March, Retrieved from: https://www.financialexpress.com/industry/banking-finance/india-heading-for-another-npa-crisis-rbi-predicts-bad-loans-could-be-as-high-as-12-5-by-march/2034493/
4. Economic Times (2020), Retrieved from: https://economictimes.indiatimes.com/industry/banking/finance/banking/bank-npas-may-rise-4-percentage-points-due-to-covid-pandemic-reserve-bank-of-india/articleshow/77150054.cms?from=mdr
5. Live Mint (2020), Public sector banks' gross NPA ratios may rise to 13.2% by Sept 2020: RBI, Retrieved from: https://www.livemint.com/industry/banking/public-sector-banks-gross-npa-ratios-may-rise-to-13-2-by-sept-2020-rbi-11577459006076.html
6. Financial Express (2017), Retrieved from: https://www.financialexpress.com/opinion/recapitalisation-success-depends-on-future-reforms-cea-arvind-subramanian/906844/
7. RBI (2015), Report on Trend and Progress of Banking in India 2014-15, Retrieved from: https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/0FLTP577BF4E172064685A26A73A6BC9210EC.PDF