Rising bad loans

One of the undesirable fallouts of the slowdown, following the September 2008 crisis, is still being felt across Indian banks. As domestic credit growth at the time was at its peak with the economy witnessing its highest expansion to date, it was but natural that the ripples from the tsunami that hit Wall Street and then the real global economy would reach Indian shores. With industrial output decelerating as export growth decreased, the collateral consequences were bound to be felt on banks, first in a slowdown in credit offtake but, more perniciously, a rise in the volume of ‘bad' loan assets.

Last December, in response to a question in Parliament, Mr Namo Narain Meena, Minister of State for Finance, said that gross non-performing assets (NPAs) of banks had increased 30 per cent and that the RBI was taking appropriate steps to stem the tide. In January, the Chairman of the State Bank of India, India's largest bank, confirmed the worst fears by asserting that NPAs in banks “are increasing and may continue to rise in the next one or two quarters due to the lag effect.” Now, a story in this paper highlights the interplay of growing NPAs and the RBI-stipulated higher loan-loss provisioning that have dented the profits of five leading banks, accounting for about half of market share of publicly-owned banks that, in turn, account for more than 70 per cent of total banking business. Why have the banks concerned stepped up provisioning? On account of the restructuring of corporate accounts that could have otherwise slipped into bad loans or NPAs, and as a result of loans given to farmers who availed themselves of the debt waiver and relief scheme and, finally, provisioning for pension liability. Aggregate data on the magnitude of each are not available but for the SBI, for instance, the total restructured loans amounted to Rs 32,750 crore while Rs 4,422 crore slipped into NPAs. This is a huge amount for one bank to roll over and reveals not just the capacity of the SBI to delay the recovery process but also the vulnerability in the event of a delay in the debtors' turnaround. One bank chief has been quoted as calling the pace of slippage temporary. But the fact that corporate loans are being rolled over suggests that for some at least happy times have not returned.

The RBI's prudence for higher provisioning then acquires a grim context of uncertainty. Rescheduling or restructuring, necessary as it might be for the good of the corporate entity and banks, is just a step away from non-performance. Hopefully, it will be a step towards recovery and better times.

COMMENT NOW