A response to an RTI query has revealed that 29 state-owned banks wrote off a total of Rs 1.14 lakh crore of bad debts between financial years 2013 and 2015. The amount written off in these years is more than that in the preceding nine years. The total bad debts shot up from Rs 15,551 crore in March 2012 to Rs 52,542 crore by the end of March 2015. The top culprits — who have written off the most loans — belong to the public sector. This is not a new problem. Several experts have pointed towards the growing non-performing assets (NPAs) in the banking sector since the start of financial year 2012, in the aftermath of the global financial crisis. Public-sector banks (PSBs) account for almost 70 per cent of all banking activity in the Indian economy and any slippages have to be borne by the government, or indirectly, the taxpayer. High and increasing levels of NPAs are also holding back monetary policy transmission in the economy, wherein interest rate cuts by the RBI fail to attract greater investments. The latest Financial Stability Report of the RBI, released in December, shows that the NPA crisis is only getting worse. Just between March and September 2015, net NPAs as a percentage of total net advances have increased to 2.8 per cent from 2.5 per cent. It is for these reasons that such write-offs merit a deeper investigation.
Broadly, there are three reasons why banks have faltered. One, due to the overall economic growth deceleration. Certain sectors, for instance, the manufacturing sector, especially medium and small enterprises, were affected far more than others. Two, the policy paralysis that afflicted the second half of UPA 2 meant that many projects either kept waiting for approval or could not take off due to partial approvals. Three, the credit evaluation mechanism at the level of the banks was found wanting. Of course, in some cases, it may be true that the unexpectedly sharp deceleration of the economy played a crucial role. However, as the P.J. Nayak Committee report released in 2014 revealed, the governance of PSB boards had systemic flaws, which are yet to be addressed. Unlike the better-governed private-sector banks, more focused on retail loans, the PSBs had an overwhelming exposure to infrastructure-related projects, which had a long gestation period.
The NPA problem cannot be wished away. Ignoring it will make it worse. The first step is to know the true level of NPAs in the system. It is welcome that the RBI stands firm in its demand that banks come clean by March 2017. It has also provided solutions such as the Strategic Debt Restructuring mechanism. It is time for the government to do its bit by introducing structural reforms in banking. A look at the Nayak Committee recommendations will help.