The Reserve Bank of India released its data on banking for the year of 2019. The prime headline seen was about reduction in gross and net NPAs showing the robustness of banking sector and the success of controlling. While the broad headline is true, the details reveal trends equally interesting. The numbers tell a story which news headlines don’t.
We primarily focus on Public Sector Banks (PSBs) since most NPAs are from government owned banks.
Trends of Gross NPAs
It is widely known that after the Asset Quality Review in 2014-15, the real amount of NPAs piled up during earlier UPA government came to light. The procedure became strict for classifying loans as NPAs. Now even a single day’s default to repay an installment was treated as NPA. Thus, after 2014-15, the amount of gross NPAs increased continuously. This growth was arrested for the first time in 2019 where the gross NPAs reduced.
Fresh Addition of Bad Loans
The additions to NPA continued after 2014-15 as every year fresh NPAs were unearthed. There was a peculiar hike in 2017-18 as seen from the graph. It was due to the February 12 Circular of RBI that made it compulsory to notify every loan as NPA if it defaulted for even one day. This led to a spike in 2017-18. But in 2018-19, the fresh additions reduced substantially.
It also means the government was successful in clamping down fraudulent loans which used to be given during UPA. (PM Modi called it “phone-a-friend” style of loans). The banks became much more conscious about the loans granted.
Crony capitalism during UPA days was unabated. It should be noted that in UPA times, Vijay Mallya’s Kingfisher got few hundred crore loan based merely on Kingfisher ‘logo’. Nirav Modi’s Letter of Undertakings were renewed illegally after 2011. All are categorized as reckless lending practices. All this stopped after 2014 and reflects in the lesser fresh additions in NPA.
Recovery vs Write Offs
Once a loan is entered as NPA on the bank’s balance sheet, broadly there are only two ways of clearing the balance sheet.
- One is recovery i.e making sure the loan is repaid by the defaulter by selling the collateral, taking over of the defaulting company and so on.
- The second one is write-off. It means the loan has no hope of recovery in the current circumstances. So it is cleared off the balance sheet of the bank. It doesn’t mean the defaulter is let free. If later on, the bank feels the defaulter is capable of paying, it can pursue the case for recovery.
Most loans are a mix of the above two. Some part of the loan is recovered and some is written off. Hence banks suffer only partial loss.
Recoveries have been a contentious issue. Various mechanisms existed like Lok Adalats, Debt Recovery Tribunals (DRT), SARFAESI Act, etc. The latest addition was the Insolvency and Bankruptcy Code (IBC) in 2017. The increased recoveries are essentially a result of IBC. The following table tells you which mechanism recovered the highest for 2018-19.
|Recovery Channel||No. of Cases||Amount Involved||Amount Recovered||Recovery Rate
The recoveries from IBC are 42.5% while others barely touch double digits. This shows the effectiveness of IBC as a mechanism despite all the delays.
One more interesting trend is that cases in IBC are very low as compared to Debt Recovery Tribunals and other mechanisms. But the amount involved is high showing all big defaults are solved by IBC. This has been driven by rules of RBI to refer big loans to IBC. (The famous Feburary 12 Circular).
Sector-Wise NPA trends
The gross NPA in major sectors shows the concentration of NPA and the pace of recoveries.
- Retail loans (home loan, car loan, education loan, etc.) are least contributors to NPAs. Given their small value, its easy to recover too.
- Service sector NPAs have stayed almost same and within tolerable levels.
- Agriculture loans are going to be the next challenge to recover. There has been steep growth in NPAs given the droughts and fall in prices of crops. Loan waivers don’t seem to be addressing the core problem
- The real dark horse has been industrial sector. It had maximum NPAs given the cases of crony capitalism. The reduction in NPAs after March 2018 has been steeper given the success of large loan recoveries through IBC.
Increased Provisions- Safety Net for Banks
Provision is essentially some amount set aside as a safety if the loan is not recovered. Suppose a bank lends Rs 100 but it feels its risky to recover it. Bank sets aside additional Rs 30 as a provision at the very first day. Thus if Rs 100 are not recovered, it won’t be a shock for bank as it has kept Rs 30 as a reserve.
More the provisions, better it is for the economy as banks won’t be affected if loans are not recovered. Provision coverage ratio is thus calculated as provisions as a ratio of gross NPA. The following graph shows the trend of the ratio.
The provision coverage ratio for all scheduled commercial banks has come to a comfortable level of about 60%. It means 60% of loan amount is now covered under provisions. Same level has been attained by Public Sector Banks.
The crucial point is that before March 2018, it was less than 50%. The increase again reflects the actions taken by RBI and government in ensuring the NPA problem doesn’t blow out of proportion.
The banks are slowly moving out of the NPA mess. The process and procedures might have their own drawbacks. What matters is that they are being improved continuously. 2020 is here. The worst for banking sector may be actually over.