Reserve Bank of India Governor Raghuram Rajan on Thursday expressed concern over the increase in the non-performing loans (NPL) of the banking sector. The situation, he said, had not reached peak levels yet, but there are concerns about the effect on the banking system and on taxpayers.

“If you ask, am I worried from the perspective of ‘are we in danger of a financial crisis?’ The answer is: no. Am I concerned about the losses that it implies and the effects on bank functioning, on losses to the taxpayer? Yes, I am concerned about the size of the NPLs,” Rajan said while addressing the media after a meeting of the RBI's central board in Goa.

A recent International Monetary Fund report said the domestic banking sector was in trouble with a whopping 36.9 per cent of the country’s total debt being at risk — among the highest in emerging economies.

Set to surge

Total bad loans or gross non-performing assets (NPAs) of Indian banks will rise by ₹60,000 crore to ₹4 lakh crore in FY16, according to a Crisil Ratings report. This has prevented banks from lending more, despite two interest-rate cuts by the RBI.

“Some banks have managed to start bringing down their bad loan positions; for others, they (NPLs) are still increasing. I would feel confident when there is a more uniform series of results across the banks,” Rajan added.

The RBI Governor said resolution of NPAs would be possible only with higher economic growth and the actions banks take. “The combination of action by banks as well as growth tend to restore bank health,” he emphasised.

The stressed assets ratio (gross non-performing assets plus restructured standard advances to gross advances) for the system as a whole rose to 10.9 per cent at the end of March 2015 compared with 10 per cent in March last year.

This means that nearly ₹7.05-lakh crore worth of bank loans now fall in the stressed category compared with ₹5.91-lakh crore last year.

The pile of cases related to bad loans awaiting resolution with debts recovery tribunals (DRTs) across the country has more than doubled year-on-year to a whopping ₹3.75-lakh crore. The amount of outstanding debt awaiting resolution at DRTs was about ₹1.79 lakh crore at the end of March 2013.

DRT bottleneck

Bankers attribute this increase not only to deterioration in credit quality, resulting in banks and financial institutions knocking on the doors of DRTs, but also to the pendency of a large number of cases in the Tribunals.

The average gross non-performing assets (GNPAs) to gross advances ratio of the banking system had deteriorated to 4.1 per cent at the end of March 2014 against 3.4 per cent a year earlier.

According to the RBI, industry segments such as infrastructure, metal & products, textiles, chemicals, engineering industries, and mining/quarrying accounted for over a third (36 per cent) of GNPAs as of March 2014.

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