Rising NPAs


Already facing increased pressure for reduction of Non-Performing Assets (NPAs), the Public Sector Banks (PSBs) in the country are likely to experience the worst in the months to come as the NDA-government refuses to take the issues seriously. The political interference that has led to such a situation, the PSBs are hard-pressed to save the hard-earned money of the depositors, whom they owe a responsibility for protecting their funds. Those ruling the roost in the corridors of power are busy in the blame game and hurling abuses on the previous regimes and holding them responsible for advancing bad loans to the corporate houses in the country and then allowing them to flee the country. That is not the case, in fact, those still thriving in the country owe large chunks of money to the banks and their bad debts have been written off with intervention of the present government. The latter has also infused lakhs of crores of rupees into the banks for keeping them afloat. There is no explanation from the rulers why bad debts to the extent of almost Rs 3 lakh crores have been written off during the past less than four years of their governance. Those who have managed to flee the country to escape prosecution owe only a fraction of bad debts that have been compromised by the present regime. The financial stability report released by the Reserve Bank of India (RBI) this month has warned that the Gross NPAs of scheduled commercial banks in the country could rise from 11.6% in March 2018 to 12.2% in March 2019, which would be the highest level of bad debt in almost two decades. This puts at rest the hope of a bottoming out of the NPA crisis that has affected the banking system and impeded credit growth in the economy. The RBI has also warned about the rising external risks that pose a significant threat to the economy and to the banks. The tightening of monetary policy by the US Federal Reserve and increased borrowing by the US government have already caused credit to flow out of emerging markets such as India. The increase in commodity prices is another risk on the horizon that could pose a significant threat to the Indian rupee and the country’s budgetary and current account deficits. All these factors could well combine to increase the risk of an economic slowdown and exert pressure on the entire banking system. The private banks have fared better because they did not come under the political influence to extend loans to those, who are potential defaulters among the corporate houses except in few cases. The current crisis faced by the banks has been due to external factors because of economic slowdown, but the central government has been refusing to accept this phenomenon. The government has been claiming that the Indian economy has remained insulated from external factors. One more major highlight of the RBI report is finding that public sector banks (PSBs) are far more prone to fraud than their private sector counterparts. This is significant in light of the huge scam unearthed at a Punjab National Bank branch earlier this year. The RBI notes that more than 85% of frauds could be linked to PSBs, even though their share of overall credit is only about 65%. This should come as no surprise given the serious corporate governance issues faced by PSBs, which to a large extent also contributed to the lax lending practices that are at the core of the NPA crisis. The RBI report noted that governance reforms at PSBs, if implemented, can help improve their performance and also reduce their operational risks. For now, the RBI expects the government’s recapitalisation plan for banks and the implementation of the Insolvency and Bankruptcy Code to improve the capital position of banks. These reforms can definitely help in improving the performance. But unless the government gathers the courage to make drastic changes to aspects of operational autonomy and the ownership of PSBs, the crises will be hard to prevent in the future.