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Bank NPA – Is there a road to Recovery?

By: Joydeep Dass
Faculty – Finance
Mobile: +91-9175360870
A crisis seems to be looming large in the Indian banking Industry. Banks are grappling with non-performing advances, and increasing with each passing day, and seems to be rotting the entire financial system. In simpler terms, there is no sign of improvement though the Ministry of Finance is struggling to improve it. A country like India cannot afford losses of such enormous proportions.
The recent RBI financial stability report published last month does not show any signs of optimism. The growth rate of deposit has been slow which in turn is affecting advances. The report indicates that the NPA has increased to around 12% in March 2018 from previous 9% earlier. In 2017, RBI directed about half of the public sector banks to improve NPA and put them on the PCA list (Prompt Corrective Action). In the last couple of years, the Government of India has infused approximately 1.5 trillion INR in all the PSBs. The sick banks have taken the lion’s share of two third which comes to around 1 trillion INR. The Government of India has budgeted around 650 billion INR for capital infusion in the financial year 2018-19. This amount is astronomical for a country like India and a sure drain on public finances. The opportunity cost is huge which can potentially drag the Country in severe financial crisis.
The banks, which is in the PCA list, is worsening day by day. RBI says that the GNPA ratio (Gross Non performing asset) will increase to about 24% by end of March 2019. 90% of the PCA banks will have serious capital deficiency and with the loan portfolio diminishing, they will simply be out of business very soon. It is very disheartening to note that two of the total 21 PSB have reported profits. The recent approval of IRDA to merge IDBI with LIC for a 51% stake is only a temporary measure and the Government has plans to merge some other loss making PSBs in the near future. The Government believes that consolidation is the only way to come out of this debt trap but this is a road less travelled and remains to be seen as to what benefit this will accrue. In the current scenario, most of the PSB are mismanaged; inefficient and overhead expenses are eating away 90% of the interest income, which in turn leaves no room for starting fresh lending. The administrative red tape has become such a grave problem that it is increasingly difficult to swim through the vicious circle of losses.
The Banks stressed assets were at 12.5 billion INR at the end of March 2018. In terms of GDP, it is around 10% and half of the national budget for the year 2018. The Government has already sounded alarm bells and now actually on the ground and has decided to set up Asset management companies (AMC), Alternate investment funds and a procedure to put the assets on auction. This is aimed at immediate capitalization and underlying bad assets would be monetized to compensate those who purchase bad loans. This is a welcome step, as it will create a functional market for distressed assets. SMEs have been given a 90-day period to resolve bad loans. For large banks, it proposed creditor agreement to accelerate the process of resolution under the Insolvency & Bankruptcy Code, which came into force in December 2016. The IBC process is already jammed with plethora of other bankruptcy cases. The national Company Law tribunal (NCLTs) data indicate that 40% have been escalated to financial creditors, another 2500 cases are in the que and so far approximately 200 have been closed and only 13% of the total cases have been resolved. Out of the total NCLT cases, 50% went into liquidation and about 40% is under dispute.
The resources are also insufficient to tackle the pile of debts and bankrupt companies. There are 11 NCLT across India and 1 appellate (NCLAT) at Delhi. The Government has mandated that all insolvency proceedings have to be taken up by Insolvency professionals who is certified by the Insolvency & Bankruptcy Board of India. The professionals are not experienced and competent enough to take up the insolvency cases. The NCLT judges are overburdened with work and they handle other cases daily in addition to insolvency. The period is also very lengthy which is 14 days to admit a case, 180 days to resolve, further extendable to 90 days. This causes delay, which in turn worsens the NPAs of Banks.
There is however, some respite and good news that few cases have been resolved at the end of March 2018. The creditors have recovered more than 50% of their debts and cases are taking about 250 days to resolve. The Industry is optimistic that the NPA leve
l will decline as the IBC proceedings pick up speed. RBI is doing its bit to fasten the belt but the fight against NPA should be on war footing to restore confidence, bring the Industry to normalcy and put to track yet once again.