In a state of flux

| Updated on January 02, 2019 Published on January 02, 2019

The Financial Stability Report suggests that the NPA scene has improved, but these are early days

It is hard to be entirely convinced that India’s banks are truly out of their dark phase, with their non-performing assets tapering off from March 2018 levels. The Reserve Bank of India’s Financial Stability Report (FSR) points out that “in a possible recovery from the impaired asset load, the GNPA ratio of both public and private sector banks showed a half-yearly decline, for the first time since March 2015...” just before the Asset Quality Review (AQR) exercise began. While acknowledging that a fall in gross non-performing assets from 11.5 per cent in March 2018 to 10.8 per cent in September 2018 suggests that the NPA problem has peaked, it should not be forgotten that the March 2018 NPAs were extraordinarily high. In addition to the disclosures over the years owing the AQR process, the ‘February circular’ also led to stressed advances converging into NPA ones. A decline since then does not seem surprising. As for an improvement in credit growth to 13.1 per cent (year-on-year) in September 2018, this seems to be restricted to pockets such as the retail and services segment. This too does not surprise, as the lending seems to have been driven by private banks, which favour retail lending. While public sector banks’ credit growth has improved from 5.9 per cent in March 2018 (year-on-year) to 9.1 per cent in September 2018, this is way below the 22.5 per cent spike in the case of private banks in September 2018. A pick up in lending to a cross-section of the economy may take time. However, the Centre, keen to arrest slowdown impulses in the economy by pushing lending, should ensure that governance reforms in banking are not shelved.

The recent relaxation of NPA norms with respect to MSMEs is understandable, but it needs to be viewed against the report’s observation that the “performance of PSBs in the MSME segment trails that of other intermediaries...” The FSR observes that lending by private banks is in the nature of “asset backed loans”, while PSBs are “extending plain working capital and term loan structures”. Therefore, the flow of credit to MSMEs is compounded by a governance problem in PSBs. It would seem that their large, decentralised network is not translating into a better grasp of micro-realities. Banks need to encourage a diverse set of skills at the branch level.

In trying to push lending, the RBI and the Centre need to reconsider the present approach of blaming bankers for all failed loans. A distinction needs to be made between a bona fide lending decision gone bad and one that smacks of corruption. It is only too easy for a public sector banker to stop lending altogether in the fear of being entangled in a ‘vigilance case’. Rather, the focus should be on creating transparent processes and robust, accountable boards, along with ‘verticals’ of sector specific experts. Banking reforms have only just begun.

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Published on January 02, 2019
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