India wants to develop fast. We are the fastest growing
major economy and we believe we can go even faster. However, slow credit growth
is proving to be a big hurdle. Subramaniam Swami blames the RBI Governor Raghuram
Rajan. He argues that RBI governor’s reluctance to slash the interest rates is
hampering the credit growth. Mr Swami has even questioned Rajan’s patriotism to
prove his point. In reply, Raghuram Rajan has said that slow credit growth is
due to the NPAs (Non-Performing Assets) on the balance sheets of public sector
banks.
What are NPAs?
Loans and advances are assets for the banks. They are
considered performing if they generate income regularly in the form of
interests, commissions, etc. When an asset stops generating income for the bank
for a period of 90 days, it is termed as a non-performing asset or an NPA.
How did the NPA problem develop?
NPA problem is not new to Indian banking. Narsimham
Committee in its 1998 report recommended, among many other recommendations, a
proper system to analyse and classify NPAs into different categories i.e.
standard asset, sub-standard asset and loss asset. It also recommended that
banks make provisions for the bad loans.
Till 2008, NPAs were majorly a private sector bank problem.
Things started to change after that. The prudential banking practices
recommended by the Narsimham Committee were ignored and Public Sector Banks
started to feature on NPA lists. The public sector banks started giving out
loans left, right and centre without due diligence. The aim was to increase the
balance sheet totals, an appeasement tactic to impress their promoter
(Government). Easy credit coupled with policy logjam, bad rains and global
economic slowdown resulted in bad loans and NPAs.
As of September 2015, of the top 10 banks with high gross NPAs, 9 belonged to the Public Sector.
How big is it?
The gross NPAs
ratio steadily declined from 15.7 per cent in 1996-97 to 2.36 per cent in
2010-11. However, the amount of non- performing assets witnessed spurt
subsequently and as on March 2015, it was at 4.62 per cent of the gross
advances of the banks in comparison with 2.36 per cent of the gross advances as
at March 2011. The growth in NPAs was much higher than the growth in advances
during the last four years. In addition, the ratio of restructured standard
assets to gross advances grew to 6.44 per cent as at the end of March 2015 from
5.87 per cent of gross advances as on March 2014. The total stressed assets
(i.e., NPAs plus Restructured Assets) as on March 2015 were 11.06 per cent of
gross advances.
Declining growth in Gross Advances (blue line) is a major factor in slowing India's GDP growth.
How NPAs affect the economy?
Figures are volatile and change with time. What is important
is to understand how NPAs cause problems for the economy. NPAs affect all the
stakeholders from lenders and borrowers to shareholders and public.
Profitability:
Profitability takes hit on two fronts. One, interest income is not earned. Two,
provisions for the NPAs come directly out of profit.
Credit Contraction: The problem Indian economy is facing currently. NPAs reduce banks’ income and ability to lend. This creates a negative pressure, slow credit growth and leads to economic slowdown.
Net Interest Margin: Banks might lower the interest rate on deposits or increase interest rates on loans to maintain the desirable NIM levels.
Equity: Shareholder’s wealth takes a hit every time NPA figures are talked about. Public confidence in the banking system takes a dive and so does the share prices. If NPAs reach 5% of the total advances, banks also cannot give out dividends without prior permission from RBI.
Credit Contraction: The problem Indian economy is facing currently. NPAs reduce banks’ income and ability to lend. This creates a negative pressure, slow credit growth and leads to economic slowdown.
Net Interest Margin: Banks might lower the interest rate on deposits or increase interest rates on loans to maintain the desirable NIM levels.
Equity: Shareholder’s wealth takes a hit every time NPA figures are talked about. Public confidence in the banking system takes a dive and so does the share prices. If NPAs reach 5% of the total advances, banks also cannot give out dividends without prior permission from RBI.
What does Rajan want?
Raghuram Rajan, in his three years as RBI governor, has
continuously emphasised on bank balance sheet clean up. He has given a deadline
of March 2017 for the banks to get rid of NPAs from their balance sheets. To kick
start the process, RBI came up with Asset
Quality Review (AQR) to review and classify assets under suitable categories and make banks
accept the problem.
Last month, on June 13 2016, RBI issued guidelines on Scheme for Sustainable Structuring of Stressed Assets (S4A). This scheme is developed in consultation with lenders to strengthen their ability to deal with stressed assets and to put real assets back on track by providing an avenue for reworking the financial structure of entities facing genuine difficulties.
However, after the clean-up, steps need to be taken to ensure that such a situation does not arise again in future. For this, due diligence is required. Proper evaluation of credit proposals needs to be done. Selection of right borrowers, viable economic activities, adequate finance and timely disbursement, end use of funds and timely recovery of loans should be the focus areas for preventing or minimizing the incidence of fresh NPAs.
Last month, on June 13 2016, RBI issued guidelines on Scheme for Sustainable Structuring of Stressed Assets (S4A). This scheme is developed in consultation with lenders to strengthen their ability to deal with stressed assets and to put real assets back on track by providing an avenue for reworking the financial structure of entities facing genuine difficulties.
However, after the clean-up, steps need to be taken to ensure that such a situation does not arise again in future. For this, due diligence is required. Proper evaluation of credit proposals needs to be done. Selection of right borrowers, viable economic activities, adequate finance and timely disbursement, end use of funds and timely recovery of loans should be the focus areas for preventing or minimizing the incidence of fresh NPAs.
No comments:
Post a Comment