Stress and solutions

The macro stress tests conducted on 148 scheduled commercial banks by the Reserve Bank of India establish what is already known — that banks are under severe stress from bad loans. What is noteworthy is the central bank’s warning, in the half-yearly Financial Stability Report (FSR), that things are likely to get worse before becoming better. The gross non-performing assets (GNPA) ratio, which was 4.6 per cent in March 2015 is projected to deteriorate to 4.8 per cent by September before improving to 4.7 per cent in March next year. And this is in the least stress scenario. If the macroeconomic conditions turn unfavourable, the GNPA ratio could rise to as high as 5.9 per cent by March 2016. Though the central bank has tempered its warning with the observation that risks to the banking sector have moderated marginally since September last year, the message is clear: NPAs need to be tackled before they turn a threat to the banking system.

The problem children are mainly in the power and iron and steel industries, which together account for more than a quarter of the stressed assets. Indeed, the NPA problem could well go through the roof if power distribution companies fail to immediately pay at least one instalment of interest on their loans aggregating to a whopping ₹53,000 crore. The moratorium period for repayment of principal of ₹43,000 crore ended in March, and it seems likely that the state utilities will default on their obligations. Their finances are in poor shape and they have been unable to arrest the problem of revenue leakage through transmission and distribution losses. In the steel sector, as many as five of the top ten private players are under severe stress due to delayed projects, falling prices and low demand. Commodity prices are unlikely to recover in the near term and the turnaround in the economy is tentative at the moment, which means that exposure of banks to steel companies is likely to stay in the non-performing assets list for some time to come.

What is needed is multi-pronged action to redeem the situation. Banks have to take the cue from the RBI, which has given them wide powers to go after wilful defaulters. Borrowers who are taking cover behind the excuse of the slowdown in the economy need to be shaken up and, as Governor Raghuram Rajan said on his first day in office, promoters have no divine right to stay in charge, particularly those who mismanage their companies. Also, the Centre needs to play its part by rolling out the much-delayed reforms such as allowing greater autonomy to public sector banks, reducing its equity in them and initiating the process of consolidation that will see weaker banks merging with their stronger peers. Clearly, the ₹7,940 crore set aside in the budget for recapitalisation is way too small considering the magnitude of the NPA problem. The Centre may have no choice but to increase this substantially.

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