Trouble at the bank

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.

Given that the share of PSU banks in loans remained constant, at around 75 per cent, between March 2009 and September 2013, while their share of bad loans rose from 64.5 per cent to 86.1 per cent, PSU banks are obviously less efficient than their private counterparts. But it would be unfair not to recognise the role of government. Around half of today's Rs 1,93,000 crore of NPAs emanate from the priority sector. Of the Rs 2,30,000 crore up for restructuring before the CDR cell, a sixth is to infrastructure sectors like power and roads, a fifth to steel PSU banks lend the most to these sectors partly because the government wants them to. While the economic slowdown has contributed to such loans getting impaired, the inability to get fuel thanks to Coal India's inefficiency or to get an environmental clearance or a bauxite/coal mine think Vedanta and Hindalco has also been crucial. Putting the lion's share of the blame on PSU banks is expedient, but the government also has a large role. And the RBI has been lax in not tightening norms much earlier.

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