The sordid story of NPAs

Despite the decline in Gross NPAs, concerns persist over new NPA creation and the need for better management of Indian banking system.

Within banking circles, it is often acknowledged that non-performing assets (NPAs) are an inherent part of the banking business. Some loans will inevitably go bad, and this reality is accepted. However, this theory does not always translate into practice in the manner intended, particularly in the Indian banking sector. The Indian banking sector has shown a unique efficiency in pursuing small borrowers while overlooking the larger ones, embodying the essence of the famous quote: “If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”

Has the ground reality changed in recent times? Recent news reports suggest so, shedding light on a significant drop in NPAs in the Indian banking sector—down to a 10-year low, according to reports that quote the RBI’s Financial Stability Report released on June 28, 2023. According to the reports, Gross NPAs stood at 3.9 per cent in FY 2023, down from a high of 11.5 per cent in 2018. The period also saw gross advances grow from Rs 83.6 lakh crore in 2018 to Rs 135 lakh crore in 2023. Therefore, the decrease in the percentage of Gross NPAs in relation to the increased base of advances may not tell the full story. Nonetheless, the decline in the Gross NPA percentage is a turnaround of sorts. The RBI report highlights this trend, stating: “The Indian financial system, led by a sound banking system, remains stable and supportive of the productive needs of the economy. Aided by robust earnings, adequate capital and liquidity buffers, and improving asset quality, Indian banks are well positioned to sustain the upturn in the credit cycle that has been underway since early 2022.”

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A different picture emerges when considering the number of new NPAs that continue to emerge within the system. If the old NPA number fell because of huge haircuts and write-offs and new NPAs continue to be added to the system, then that raises a different set of questions regarding the management of NPAs and the protection of what are essentially public funds. All the funds that the banks have belong, after all, to the people of India, ordinary citizens who provide the capital from their savings to be lent out to businesses, which must invest them to power economic growth.

So, what has caused the fall in Gross NPA percentage? Robust recoveries are a positive factor, while write-offs are less favourable. Strict follow-up and appropriate penal or criminal action, where warranted, would signal a resolve to tackle the issue of rising NPAs. While NPAs can indeed stem from genuine business failures, they are often entangled with weak governance and the peculiar Indian phenomenon of wilful defaulters—individuals who possess the means to repay but choose not to, and carry on without consequences.

Consider the numbers. In 2021–22, Gross NPAs were 5.8 per cent, which translated to a total NPA of Rs 7.44 lakh crore. This number was down from Rs 8.35 lakh crore at the beginning of the year. The single largest contributor to the lowering of the number was write-offs, which were reported at Rs 1.79 lakh crore. More significantly, Rs 2.83 lakh crore of new NPAs were added in 2021–22, the latest for which data is available.

In fact, in the last five years (2018–2022), the period when Gross NPAs have fallen from 9.2 per cent to 5.8 per cent, the total write-offs have been to the tune of Rs 10.25 lakh crore. In the same period, new NPAs of just under Rs 20 lakh crore have been added. Year after year in this period, the number of new NPAs added was higher than the numbers written off or recovered from the Gross NPAs. While the older gaps are being patched, newer and probably bigger ones are emerging in the ship. This cannot be a stable, let alone robust, vessel to sail the seas.

The problem of NPAs may not be getting better from a systemic perspective either. We are nowhere near the better assessment, monitoring, supervision, controls, and governance systems that make the banking sector sound. The laxity apparent in the figures, coupled with the lack of alarm over the state of affairs, indicates that NPAs have become normalised and that the system appears to have internalised the belief that this is the way things work in India. This encourages a loose system to become even looser, rather than tightening up and enhancing efficiency. The actions and signals from regulatory authorities can make a significant difference. A willingness to take action against wilful defaulters, along with naming and shaming them, is absent. Instead, the regulator has allowed banks to “undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such debtors.” The very idea of a “settlement” with a defaulter who is classified as a fraudster or wilful defaulter sends a signal that deals can be struck, and after a brief cooling period, the defaulter can return for more loans.

All of this may be considered regular banking parlance, but it fails to inspire confidence among the people of India. Added to the political-business nexus that plays a powerful influence on public policy, the image it creates is of India’s financial institutions rotting and going to seed. This weakens the fabric of the nation, co-opts only those who can play the game by bending the rules, and is a barrier to growth that is good, sustainable, and open to all players.

In a nation where small subsidies provided to deserving citizens are being called into question and political debates deliberately revolve around stopping these initiatives and deriding them as “revdi” culture, as if the people of India are beggars seeking small handouts, the management of NPAs seems to be a sorry exercise. This money belongs to the people of India, and if banks fail to monitor the genuineness of projects and the use of funds, both the lender and the borrower must be held accountable. Anything less than this is tantamount to robbing the poor to pay the rich, a perception that Gross NPAs inadvertently reinforce.

(The writer is a journalist and faculty member at SPJIMR)