Alarming increase in PSU banks' bad debts

The fact that public sector banks have written off loans worth over Rs 1 lakh crore in the last five years is a terrible comment on the banks’ credit recovery and management system. The official data, given out by the government last week, does not give the full picture.

It becomes more alarming when the present state of non-performing assets (NPAs) and the real possibility of further degradation of asset quality in the coming months, are taken into consideration.

At present, the NPAs of banks amount to about Rs 2 lakh crore. These do not include the restructured assets which are expected to increase by about Rs 1 lakh crore in the next five months.  Restructuring is only a deferment of loan repayment.

Since they always involve bad debt, it is unlikely that delaying of repayment is effective. Experience has shown that much of the deferred debt eventually becomes NPAs.

The reasons for the high and still rising debt burden are well-known. Political and other influences, and pressures and corruption play a major role in the loan decisions of public sector banks.

Recovery efforts are also often stymied by these factors. To wit, there is a sizable element of crony capitalism at work in the Indian politico-economic system that has acquired greater strength as nationalised banks are at the beck and call of their political masters.

Those who default on large amounts – who account for major part of the NPAs – often get away without repayment or get the loans restructured or written off. Poor governance practices, incompetence and the absence of a good work culture are also other factors. There is always the sense that the government would finally foot the bill creating a systemic ‘moral hazard’ problem.

All this reduces accountability. It is true that the slowdown in the economy in the last few years has also seriously affected the ability of the corporate sector to repay the loans. This can be seen from the fact that the loans written off by PSU banks increased from over Rs 20,000 crore in 2010-11 to over Rs 42,000 crore in 2013-14.

However, it is worrying to note that an economic slowdown can wreak so much havoc on the banks’ NPAs. This indicates that loans were given on the basis of overoptimistic forecasts during good times, not accounting for the risk of a macroeconomic slowdown.

The government has claimed that even the present high level of NPAs do not pose a danger to the banking system because the banks’ capital adequacy base is strong enough to withstand the burden. This is a wrong approach because the huge amounts that go down the banking drain actually belong to the people.

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