A year since the Reserve Bank of India ended regulatory forbearance — the norm that allowed banks to avoid treating restructured loans as sub-standard — the pile of stressed assets at lenders has grown manifold, lengthening the shadow over balance sheets. Forced by the central bank’s time-bound Asset Quality Review to classify troubled loans correctly and make appropriate provisions for them, lender after lender has reported sizeable losses or dramatic declines in profit in recent quarters. The biggest lender, the State Bank of India, last week posted a 66 per cent plunge in fourth-quarter earnings as provisioning for non-performing assets — banking parlance for loans where borrowers have defaulted on repayments — more than doubled to Rs.12,139 crore. And SBI Chairman Arundhati Bhattacharya indicated that while a bulk of the stressed assets on its books had been recognised last quarter, more provisioning was in the offing as the bank leads lenders in the race to meet the RBI’s goal of completely overhauling balance sheets by March 2017. That the clean-up is inflicting short-term pain on banks and investors is evident. The bigger question is how much more red will be inked and what cost this is likely to impose on the economy. The SBI, for instance, has said that while gross NPAs (as a percentage of the entire Rs.15 lakh crore it has advanced to borrowers) jumped to 6.5 per cent, or Rs.98,173 crore, at the end of March, it was placing loans amounting to another Rs.31,000 crore on a watch list for ‘exposure under stress’. Coming as it does from a lender whose total loans amount to more than one-tenth of India’s GDP, the disclosures of bad and stressed loans reflect the extent of distress its borrowers representing various sectors of the real economy are experiencing. Iron and steel, engineering, power and construction are some of these key industries that undergird the economy.
The Centre is cognisant of the magnitude of the problem and has in large measure moved in lock-step with the central bank in addressing the systemic and regulatory issues that need fixing. An autonomous Banks Board Bureau is now in place, tasked with the specific brief of ensuring that state-owned lenders will hereafter be ring-fenced from political interference in the selection of top management and on business strategy. Separately, a Bankruptcy Code intended to improve the legal framework for assisting creditors in taking defaulters’ assets through a liquidation and recovery process has won parliamentary backing and could soon be in operation. At the same time, there is the risk that a clutch of lenders will need greater levels of capital infusion than previously estimated; this will test the fiscal deficit as well as the taxpayer’s willingness to underwrite the excesses of the past.
Keywords: Reserve Bank of India, SBI, Asset Quality Review, restructured loans, substandard loans, non-performing assets, Bankruptcy Code, regulatory forbearance
