February 9, 2015 12:22:16 am
Many banks have reported sharp increases in non-performing assets (NPAs) in their last quarter results. And significantly, this time it’s not just the usual suspects — public sector banks (PSBs). While the bad loans for the likes of Indian Overseas Bank, UCO Bank, PNB and Bank of Baroda have gone up, the fact that even the country’s largest private sector lender, ICICI Bank, has shown a significant rise in both NPAs and “restructured” advances is cause for further worry. Indeed, it is the slippage of restructured loans — those whose original maturities may have been extended or interest rates lowered – into NPAs that tells a larger story. The restructuring of these advances was predicated on the assumption of the economy turning around, enhancing the borrowers’ ability to meet their servicing obligations. Instead, we are seeing more and more restructured loans turning into NPAs, indicative of no real recovery on the ground.
This situation is dangerous when stressed assets — NPAs plus restructured loans — were already 10.7 per cent of total bank advances as on September 2014, with the ratio at 12.9 per cent for PSBs. If bad debts continue to mount, it will force banks to make higher provisioning against losses, thereby cramping their capacity to lend and undermining even a fledgling recovery. High domestic interest rates will only worsen things, as banks find better rated corporates preferring to raise cheaper funds through offshore bond issues. High interest rates and sluggish growth will, moreover, make it difficult for distressed borrowers to repay, further adding to the NPAs.
It is high time the government starts acting on, rather than simply recognising, the above problem. More than a month has passed since the bankers’ retreat or Gyan Sangam that even the prime minister, finance minister and RBI governor attended, but many PSBs are still without chairmen. Today, state-owned banks desperately require capital infusion, which can only come from the markets. But will investors put money in concerns that are headless and whose boards aren’t empowered to take commercially prudent decisions? One indicator of what the markets think about banks — mainly PSBs — is that while the BSE Sensex has fallen 2.9 per cent in the last eight trading sessions, the Bankex index has dropped even more by 8.4 per cent. A lowering of policy interest rates by the RBI, alongside implementation of structural reforms in PSBs making them professional board-run entities, are calls that can brook no further delay. The banking system is today in the state it was in 2001 — and the worst might still be some quarters ahead
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