With the Indian economy not picking up speed as was being anticipated, the spotlight is on the banking industry. It has been asked why the industry has been
reluctant to pass on the double-dose
rate reduction effected by the Reserve Bank of India in twin instalments outside the policy cycle this year. The answer is not difficult to find. The rising load of bad loans has put banks — especially those in the public sector — in a pincer-like situation. A combination of factors saw gross Non Performing Assets drop from a high of 12 per cent in 2000-01 to 2.5 per cent in 2008-09. These factors included an improved economy, the establishment of debt recovery tribunals, and the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. But the trend was reversed and the figure rose to 4.6 per cent in September 2014. An estimate by rating agency Crisil suggests that ‘stressed assets’ could stay flat at 6 per cent in 2015-16. And Crisil put the value of such assets at a mind-boggling Rs.5.3 trillion. RBI Governor Raghuram Rajan has
said he isn’t quite sure if the banking system has seen the peak yet in bad loans. Since public sector banks account for two-thirds of all banking activity, it is turning out to be a huge worry.
Are bad loans a transitory phenomenon, or are they a chronic problem? If it indeed is a transitory issue, it should slowly evaporate as the economy picks up. If they are the consequence of systemic ills, then the solution lies in fixing the causes. If the economic slowdown is a part of the problem, scam-induced, court-ordained interventions in vital sectors such as coal, mining and telecom have added to the banks’ misery with bad loans. The stressed banks are wary of fresh lending. The need for stricter provisioning in view of the new Basel stipulations will add to their problems. Moreover, banks will no longer be allowed to treat restructured loans as standard ones. The revamped 5/25 scheme is essentially meant to remedy the situation. It allows banks to rejig long-term infrastructure loans by refinancing or selling loans every five years. But the scheme will at best mask stressed assets since banks need not report such loans. Bad loans have put the government in a moral predicament. Can it use the taxpayers’ money to nurse the banks back to health? Besides putting in place a watertight loan appraisal mechanism, the situation calls for a new framework outside the normal banking system to address the funding needs of long-term projects. Bad loans bode ill not just for banks but also the economy. The issue needs to be addressed with the utmost priority.
