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The Never Ending NPA Crisis

Bad debts will continue to cripple banks till the end of 2018. Sutanu Guru on how this will damage Brand Modi

Photo Credit : PTI

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The year 2016 seems to have delivered many record performances on the economic front that should cheer up supporters of Prime Minister Narendra Modi. The number of domestic air passengers breached the 100 million mark for the first time. Despite a weak global economy, foreign direct investment (FDI) inflows grew 18 per cent to a record $46.2 billion. More than 10,000-MW of solar power capacity was created. The year saw agricultural output rise to a record 272 million tonnes going by advance estimates, led by a record growth in pulses production.

But there is one more dubious record that was breached in 2016. Non-performing assets (NPAs) in the Indian banking system crossed a record Rs 7 lakh crore. If you go purely by government numbers, NPAs now account for more than 11 per cent of gross advances of banks. If you go by a more realistic Reserve Bank of India figure, the share is closer to 13 per cent. And if you talk off the record to bankers, NPAs as a share of gross advances in the banking system would be actually more than 15 per cent. There is a simple reason for this difference in numbers. Many banks have transferred bad debts to individual branches which officially "show" that a recovery process in going on. In reality, and given past track record, any chances of any recovery appear remote.

This is leading to an existential crisis for some state owned banks. IDBI Bank has been in news recently because former top officials of the bank were arrested for allegedly colluding with Vijay Mallya to take loans despite a red ink blotched balance sheet and then diverting the funds. In 2016, stressed assets of IDBI Bank rose to Rs 60,000 crore, more than 27 per cent of total loans shown in the books. Two other banks, United Bank of India and Indian Overseas Bank, have stressed assets in excess of 30 per cent of their total loan portfolio. Quite clearly, these banks are on the verge of collapse and can be saved only through a government bail out. In the latest budget, Finance Minister Arun Jaitley has set aside a meager Rs 10,000 crore to recapitalise the entire banking system. Frankly, that amount can't save even one bank and both the RBI and the finance ministry have to do much more.

The balance sheets of most state owned banks are so full of bad debts that they a imply are not in a position to substantially increase lending despite the windfall gains in deposits because of demonetization. Many private sector banks too have shown a significant rise in stressed assets. Now, if banks will not, and cannot substantially increase lending, there is simply no way private investments will revive and rise significantly. GDP growth will muted as a result. Clearly not a happy scenario for Modi as Lok Sabha 2019 elections come closer and closer.

A few years ago, there was hope that the NPA crisis will see a resolution when the then RBI Governor Raghuram Rajan imitated rough steps that forced banks to write off banks loans and restructure their portfolios in a phased manner. In 2015, an RBI report had claimed that the NPA crisis will worsen for a few quarters as banks actually write off loans instead of hiding them. But the RBI had claimed that the situation will substantially improve by the January-March quarter of 2017. That promise now seems impossible to fulfil. The latest Financial Stability Report of the RBI admits in as many words that the NPA crisis will deepen till 2018 before it gets better.

Without a shadow of doubt, this is the most destructive legacy left behind by the brazen crony capitalism years of the UPA regime. But that's in the past. If the NPA crisis is not solved by the Modi regime by 2018, he will find it difficult to blame the past sins of UPA. As of now, good news on this front appears very distant.


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npas bad loans banking narendra modi rbi