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Huge, Growing Crisis In Public-Sector Banks

Amit Bhandari,
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The financial results of the just completed December 2014 quarter, compiled by IndiaSpend, point to a worsening crisis in India’s public-sector banks.


This crisis—caused by ballooning unpaid loans from sectors supposed to revive India’s economy—is not just an indicator of continuing economic woes, but a warning that the means of revival are being further damaged.


Bad loans, termed Non-performing Assets (NPA), already high in March 2014, have risen 20% over the past nine months in India’s public-sector banks (refer table below), which account for 72% of all commercial lending in India.


Indiaspend has highlighted this issue in the past, and the problem has since worsened.


Gross NPAs, or loans that have gone bad, add up to Rs 2.73 lakh crore ($44 billion) for public-sector banks.


The picture would be much worse if not for corporate debt restructuring (CDR), which usually involves tinkering with interest rates and repayment periods, to help companies in temporary financial distress. A loan under CDR is not grouped with NPAs.


The total value of loans in CDR stood at Rs 2.72 lakh crore ($43.9 billion) in December. Most of the outstanding loans under CDR, are from public-sector banks.


Put together, NPAs and CDR, amount to Rs 5.45 lakh crore ($87.9 billion).


Gross NPAs for public-sector banks stood at 5.33% of their total outstanding loans in September. The value of NPAs has since gone up, so this ratio should have also worsened.


The government says that infrastructure (including power, telecom, airports, roads, ports & rail), iron & steel, textiles, mining and aviation “contribute significantly to the level of stressed advances”.


Source: Bank financial statements, IndiaSpend research


Reasons for increase in NPA include “sluggishness in the (sic) domestic growth during the recent past, slowdown in recovery in the global economy, uncertainty in the global markets, external factors including the ban in mining projects, delay in environmental related permits affecting power, iron & steel sector, delay in collection of receivables and aggressive lending by banks during good times”, according to the Government.


Five sectors—infrastructure, iron & steel, power, textiles and construction—account for 64% of all loans currently under CDR.


Why the torrent of bad loans is a bad sign


The high levels of NPAs indicates that India’s economy is not in great shape, and the recent upward revisions in India’s GDP growth should be taken with a fistful of salt.


The weak balance sheets of public-sector lenders imply that their ability to give out loans may be reduced, with implications for national economic recovery.


Of 26 public-sector banks (nationalised Banks and the SBI Group), 19 reported Gross NPAs of 5% or more in the latest quarter (refer table below).


Source: Bank financial statements, IndiaSpend research


In comparison, private-sector banks seem to have done a much better job of managing risks: gross NPAs for all private sector banks together were 2.05% in September. For the December quarter, the six largest private-sector banks have NPAs ranging from 0.42-3.4%. (refer table below).


Private-sector lenders operate in the same space under the same economic factors as the public sector banks. Emulating their risk-management practices would appear to be top priority for government banks.


Source: Bank financial statements, IndiaSpend research


These bad loans represent a financial setback for India at three levels.


First, the bad loans represent a financial loss to shareholders; the Government of India is the majority shareholder in all these banks, therefore, this is an indirect loss to all citizens.


Second, banks are supposed to maintain sufficient capital to absorb business losses, such as these NPAs. High NPA levels eat up into the capital of these banks, restricting their ability to make additional loans.


Third, to grow, banks need to raise fresh capital. High levels of NPAs mean weak fundamentals and poor valuation in the stock market, hurting their ability to raise funds for growth. This, again, means insufficient capital to make additional loans.


If the ability of public-sector banks to lend freely is impaired, there is likely to be an impact on the larger economy, which is gearing up for a big round of private and public spending to boost growth.


Yet, countries that tried to borrow and spend their way out of trouble have likely failed in these expensive stimulus efforts, as this warning from economist Ruchir Sharma explains.

“A stimulus mindset is the opposite of a tough reform mindset, and governments can rarely do both as the contrasting experience of the 1990s showed,” wrote Sharma. “By the end of that decade, most emerging nations had no money to burn, no lenders they could turn to. They were forced instead to reform, cleaning up bad debts and pushing to make companies more competitive.”


(Amit Bhandari, is a media, research and finance professional. He holds a B-Tech from IIT-BHU and an MBA from IIM-Ahmedabad. You can reach him at amitbhandari1979@gmail.com)



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  1. Subodh Reply

    February 18, 2015 at 12:08 am

    There is another way to look at this picture. If gross NPA’s of PSUB’s are 5.33% of Rs.2.73 lac crores, I guess total advances are around Rs 60 lac crores ($1 trillion). Now, assuming that the higher NPAs of PSUBs as compared to private banks are due to looser lending norms, if the lending was as tighter as private banks, it might have resulted in lesser loans to the tune of 30-40%. i.e lesser credit creation to the effect of nearly 20-25 lac crores. We already have a very low GDP..if credit creation was effected due to stricter lending criteria, our GDP would have been further lower by 10-20%.

    Considering that our tax-to-gdp ratio is around 10-17%, the additional 25 lac crores that were added to our GDP by PSUBs would have fetched tax revenue of almost Rs. 3-4 lac crores. This amount is enough to write off the gross NPAs of our public banks. So, in effect the government is not losing anything, but the nation gains due to the multiplier effects of the additional GDP created by the banks.

    Or look at this way…out of every 100 rupees of credit creation, 90-95 rupees give a healthy yield of 10-20% while 5-10 rupees are lost. Any normal business enterprise wouldn’t mind risking 5% of capital if the rest of its investments were profitable. An equity trader wouldn’t mind losing Rs.50000 capital on an investment of a million, if he was guaranteed a potential return of Rs.1-2 lacs on the remaining Rs.9-9.5 lacs.

    As a result of higher risk-taking ability of PSUB’s, India as a whole is able to create more credit which results in higher GDP, more jobs and more tax revenue for the government. So why are we getting paranoid over the current rate of NPAs? In 1994, the NPAs of PSUBs were 5 times more at over 24% of advances. If the then government was able to restructure them and write off the rest of the NPAs, why should repeating the same process be difficult now?

    • pannvalan Reply

      February 16, 2016 at 10:03 pm

      Bad loans will never spur growth and development. A small example: A person who is in the habit of taking bribes will not spend a major part of the bribe money in useful ways.

      Similarly, the bad borrowers breed corruption and other crimes including tax evasion, siphoning of funds, hawala deals–i.e.taking their ill-gotten wealth abroad (especially big-ticket money). They lead an extravagant life and spend their money in unproductive ways. So, no increase in GDP, no additional employment creation, and no contribution to national income and government tax kitty.

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