At the crossroads of making a paradigm shift

The Banking Stability Indicator shows that the stability conditions in the Indian banking sector, which started deteriorating in mid-2010, have now worsened significantly.

Apart from low profitability of banks, deteriorating asset quality was a big factor, which has increased the risk in the banking sector. Just before the global financial crisis of 2008, the ratio of Gross Non-Performing Assets to Gross Advances (GNPA Ratio) of the Scheduled Commercial Banks (SCBs) was 2.3%, which has significantly increased to 7.6% as of March 2016.

The macro stress tests indicate that the GNPA ratio could reach 8.5% by March 2017. Moreover, if macroeconomic condition deteriorates from here onwards, it may go up to even 9.3%. And the system level Capital to Risk-weighted Assets Ratio (CRAR) of SCBs may decline 11.5% by March 2017 from 13.2%, as of March 2016. Increasing risk aversion given the high debt is partly impacting the overall credit growth that is hampering the investment and growth process of the economy.

Over the years, the Debt Recovery Tribunals (DRTs) are facing difficulties to comply with the stipulated time frame of resolving disputes within six months. This has resulted in delays in disposal and a high unresolved number of cases before the DRTs to around 77,000 by June 2016. While DRTs have carried out their jobs effectively and helped lenders recover substantial parts of bad debt, their progress faltered on various cases.

When it comes to willful defaulters, the list is huge; 8,167 willful defaulters collectively owe banks Rs 76,685 crore and 1,724 FIRs filed in 2015-16. In fact, the share of large borrowers’ in total loans was 58% with their share in GNPAs at 86.4% as on March 2016. This indicates the concentration of GNPAs towards large borrowers. The growing NPAs in the banking sector along with rising pending cases in DRTs are a big concern not only to the financial segment but also for the growth of the economy. The RBI and the government are seen taking the issue on priority, and have been actively trying to address the situation with various measures. 

Inability to recover money

More painful point in the banking sector is the inability of the banks to recover their money. Sometimes, it is extremely hard for creditors to liquidate a defaulting company. It was (changed recently) equally hard to rescue an ailing company, either by acquiring an equity stake (and bring in new management) or by selling the company to turnaround specialists. The weakness in the processes for bad debt resolution has been a key structural credit challenge for Indian banks. There are cases where banks have thoroughly failed to make any recovery from the borrowers.

For the fiscal ended March 2016, PSBs have written off loans amounting to more than Rs 59,000 crore. With huge loan write-offs turning a manual affair, banks have to take a huge provisioning hit when they do this, which severely impact their profitability. 

The Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Bill, 2016 aims to reduce the bad loan, which is piling up in the banking system, is a right step to address the issue. The bill is expected to improve the ease of doing business and facilitate the investment leading to higher economic growth. The bill is expected to fasten the debt recovery process and help control the rising bad loans in the banking system. While the bill has been cleared by the Lower and Upper House, it should be pushed for implementation as soon as possible. The government has come up with this legislation at a time when there is growing concern over loan recovery in view of the overall stressed advances ratio touching 11.5% by March 2016 after the Asset Quality Review (AQR) by RBI. For public sector banks (PSBs), stressed advances ratio touched 14.5%.

Apart from giving authority to the RBI to examine the statements and any information of Asset Reconstruction Companies (ARC) related to their business, it also empowers RBI to carry out an audit and inspection of these companies. This will ensure the widening of RBI’s power to regulate these companies. Widening the scope of the central registry that will house the central database of all loans against properties and to create a database which will disclose all encumbrances on property across all lenders will not only help lenders decide about loan disbursement, it will also bring transparency in the overall process.

The clearance of the Insolvency and Bankruptcy Bill is particularly significant as it strives to create an enabling environment for expeditious resolution of bankruptcies with least pain to stakeholders. The Debt Recovery Bill along with Bankruptcy Bill will help lenders boost their efforts to deal with defaulters and would lead to a structural improvement in how banks deal with troubled assets and is credit positive.

With the passage of both Bills, a complete repair of the debt recovery proceedings is foreseen and will provide a time-bound framework to deal with the stressed assets and loan recovery.

The changes are aimed at a faster and more transparent system to tackle the bad debts in the banking system by fast-tracking the recovery process for banks and financial institutions. It will give more power to the banks to take righteous actions against the defaulters which will not only help in improving ease of doing business but also facilitate investment.

The need for firmness coupled with fairness in recovering bad loans is very critical and the need of the hour. The banks need to be empowered to take effective actions against the defaulters and the passage of the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Bill, 2016 and Insolvency and Bankruptcy Bill are steps in the right direction.

The banks need to stimulate the economic growth by lending money for churning the investment and productivity cycle for the process of economic growth. If banks start to squeeze loans, there would be no support for the economic growth.

The cause of worry is when the loan becomes either NPA or stressed asset and starts hampering the process of economic growth.

(The author is lead economist at Dun & Bradstreet Information Services India)