Severe meltdown imminent
By Shivaji Sarkar
Rising prices and the Reserve Bank’s insistence on repeating its same prescription i.e. raising interest rates, are shockingly telling on the health of the banks. As a result, bad loans – non-performing assets (NPAs) – are growing phenomenally. And, if this trend persists, it would be no surprise to see a repeat of Lehman-type crash – not only of the banks but of the entire economy. Only the locale this time would be India.
In April-June quarter, the gross NPAs rose by almost Rs 5,000 crore. In January-March quarter it stood at Rs 60,685 crore and rose to Rs 65,318 crore by June-end. This is said to be the highest rise of bad loans in the past five years.
Loud alarm bells are ringing in the banking sector. Today, the NPA is one of the biggest problems that the Indian banks are facing. If not properly managed it would greatly hamper the business of banks. Worse, if the concept of NPAs is taken very lightly it would be terribly dangerous for the Indian banking sector and may lead to a severe fund crunch.
Till 2008-09, real estate & the housing segment contributed widely towards the NPA. As the economy started heating up other sectors too started defaulting. Thus, the challenges before the banks today are clearly the rising NPAs in the retail sector, propelled by high consumerism and low moral standards.
In the recent past, the corporate sector had shown improvement insofar as repayments were concerned. In fact, till a decade ago, as per a RBI study they were known for their willful default and diversion of funds. Once again there is high default in corporate repayment owing to the pinch of high interest rates.
It is not that all payments are unrecoverable. But as the amounts are mounting, banks would need to consider restructuring loans – euphemism for acceptance of delay in repayment. They have no other option. As the economy slows down, less business is generated leading to a severe cash crunch. So there is a different jargon to understand the actual level of bad loans – largely doubtful assets – and it is called net NPA. It has risen by almost Rs 3,000 crore in the quarter ending June– from Rs 24,914 crore in the previous quarter to Rs 27,311 crore. It signifies a whopping increase of 9.62 per cent.
Of late, one of the major defaulters has been the small and medium enterprise (SME) segment. The Bank of India CMD, A K Mishra has said that since the interest rates are high, many companies particularly the SMEs are finding it difficult to service their loans.
Currently, India has 96 scheduled commercial banks (SCBs) – 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have any Government stake; they may be publicly listed and traded on stock exchange) and 38 foreign banks. All have a combined network of over 53,000 branches and 17,000 ATMs. According to a rating agency report of ICRA Limited, the public sector banks hold over 75 per cent of total assets of the banking industry, with the private and foreign banks holding 18.2 per cent and 6.5 per cent respectively.
Overall two out of every three banks are seeing a rise in their NPAs. The public sector banks naturally are the worst-hit. But some private sector banks, including the IDBI Bank, are also not free from the malaise.
The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio over the years, states that public sector banks make more provisions in gross NPA & gross advances as compared to private and foreign banks. Public sector bank managers blame this on RBI guidelines. Earlier, NPAs were calculated manually. Since many banks used to conceal facts, the RBI issued instructions to decide it on the basis of computer system generated “recognition”. Many top bank officials say it inflates the reality. Now the system is based on 90 per cent information. By September it would cover 100 per cent. Technically, the September figures would be much higher.
There is truth in the assumption because the computer system does not recognise whether the delay is by a day or several months. So, the bankers’ assumption that this inflates the gross NPAs may not be incorrect. But when it comes to net NPAs, they do not answer the queries. In short, they agree that the problem is aggravating.
As of now, the bane of the Indian banking system is the high interest regime. Even the RBI acknowledges it. But its insistence on containing inflation in a hackneyed manner through monetary mechanism is causing serious problems. The Central bank’s prescription is further adding to inflation and also slowing down all other industrial activities. At a time when the country has the capability to compete in the global arena, particularly as western economies slow down, the RBI’s too cautious an approach is putting on the brakes.
Another fall-out of high NPA, according to a study by NR Institute of Business Management, is burdening honest depositors, creditors and other users with high unwarranted fees. This makes banking expensive and ultimately again adds to inflationary pressure. Besides, there is no guarantee that the NPAs would come down. In reality, banks are subsidising defaulters at the cost of others. Though this may help them in the short run, in the long-run it gives no insurance for a severe breakdown.
Importantly, the banks need to bring down their fees to encourage people to use their services more. Today, many organisations are looking for alternative routes for payments rather than opting for bank drafts, as these have become expensive instruments. However, if the fees are lowered, the banks would gain. Similarly, there are many other services which have become expensive and users are opting less for these. This has led to asset quality deterioration, a term that signifies a crunch of funds with the banks.
Significantly, the banks which are now saddled with high credit burden are anxiously awaiting a relief from the RBI. They are expecting that as in 2009-10, in the event of the US and European economic crash, the RBI would allow them to restructure their loans. That would technically relieve them of immediate gross NPA worries. But that is not a solution for the rising net NPAs. It cannot be prevented unless inflationary pressures come down and the people once again start flocking to the market for buying goods, which would in turn help pick up industrial production. However, let it be understood that if this does not happen, the meltdown may impact and impact dreadfully. —INFA