Trouble at the bank
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Economic slowdown worsens the NPA situation, but government, RBI also have some explaining to do.
With the economy slowing to about half the pace of a few years ago, when banks were lending to large infrastructure and other projects without any doubts that the party would carry on, it is not surprising that impaired assets have shot up in the manner they have. Impaired assets, both bad loans and loans in trouble, are over 12 per cent of all loans for PSU banks, and over 9 per cent for the entire banking sector. While these are lower than they were in the 1990s, as RBI Deputy Governor K.C. Chakrabarty pointed out recently, the situation can get problematic if things are not fixed. With the government as cash-strapped as it is, it can ill afford to infuse more capital into PSU banks — writing off 30 per cent of restructured assets, Chakrabarty estimates, can wipe out 18 per cent of the capital of banks. While around 15 per cent of loans in the corporate debt restructuring (CDR) cell of banks had slipped into non-performing assets (NPAs) till last year, current estimates are the number will be 20 per cent this year.
More worryingly, banks are able to recover fewer bad loans with each passing year. While nearly half of the reduction in NPAs in March 2001 was due to higher recoveries, this ratio is down to around 29 per cent today. While PSU banks clearly need to answer for this, it is something the RBI and the government also need to worry about. It is clear the debt recovery tribunals and the Sarfaesi mechanism are not working.