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Bad assets for banks rise sharply. Here's why it's good news

Neeraj Thakur | Updated on: 29 June 2016, 20:46 IST

The first biannual Financial Stability Report (FSR) for 2016 released by the Reserve Bank of India Tuesday reveals that gross non-performing assets (GNPA) in the banking sector may rise up to 9.3% by the end of financial year 2016-17 from the current 7.3%.

This will mean that within 19 months (September 2015-March 2017) GNPAs in the banking sector are likely to go up by 430 percentage points.

The condition of public sector banks (PSBs) will be a little more affected in the same period. Under normal circumstances (baseline scenario) PSBs' GNPA ratio may go up to 10.1% by March 2017 from 9.6% as of March 2016.

However, under a severe stress scenario, it may increase to 11% by March 2017.

Is this a cause of concern?

It would have been, if these NPAs were coming out gradually over a period of many years. But RBI Governor Raghuram Rajan had given a deadline of March 2017 for banks to declare all bad loans on their books.

This means that in a 'severe stress scenrario' in the lingo of RBI's report, if the Gross NPAs of banking sector could go up to the level of 9.3%, and that will be the peak of the crisis of Indian banking sector.

We must thank Rajan for calling curbing the bad practices of Indian banks by not recognising the bad loans on their balance sheets. To show a rosy picture of the current finances of their banks, the managements had done a big harm to the banking sector.

From here on the RBI with the help of bank managements should ensure that only those companies get loans who have shown seriousness in servicing their debts.

As per the leaked list of the willful defaulters there are over 5,000 such debtors who deliberately have refused to payback the money they owe to the banking system. Their loans amount to over Rs 50,000 crore.

Apart from wilful defaulters, banks also need to take into account the stress levels of different corporate houses before extending money for their new projects.

In the past, the bigger the corporate house, higher was the amount sanctioned to them without any serious evaluation of the viability of their proposed projects.

What should be done?

The government is trying to find ways to overcome the current bank crisis.

The road map for Rs 70,000 crore capital infusion into PSU banks between 2015 and 2019 had been drawn by the government.

From fiscal 2019, the Basel-III norms will set in. Basel-III is the global regulatory standard (agreed upon by the members of the Basel Committee on Banking Supervision) on bank capital adequacy, stress testing and market liquidity risk.

The new Basel norms would require capital infusion to the tune of 2.4 lakh crore in the PSBs.

Clearly, the amount of capital infusion allocated by the government is not enough. This is why the government is looking for other resources to bail out banks, by providing additional capital to them.

Among various proposals, using the excess capital of RBI to provide capital to banks is being discussed.

Some source of infusing capital will ultimately be figured out. But the bank managements must understand that this cannot be the case every time they make mistakes.

Therefore, the government, bank managements as well as investors must keep in mind that prevention is better than cure.

Rajan's carrot-and-stick approach has almost cured the Indian banking sector from its ailment of NPAs, but from here, the technique of prevention should be used.

First published: 29 June 2016, 20:46 IST
Neeraj Thakur @neerajthakur2

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