Can Indian Banks come out of NPA Mess

A wise man once said, “Banks are true reflection of economy”. On one hand we are seeing India, as is by media, as one of the fastest growing economies and on the other we are seeing lot of negative talk on Indian Banks asset (loan) quality. We often hear words like NPA, stress, Public Sector banks, cleaning of balance sheet these days in media. Before jumping the gun and forming opinion based on news, let us understand the crux of the problem.

In Bank’s parlance, non performing assets are those where the borrower did not repay the loan/interest on time to bank and the delay crossed 90 days resulting in provisioning to be made by banks in its P&L statement. We have been hearing a lot about Indian Public Sector (PSU) Banks mounting NPA issues for the last so many years. Let us have a look at the numbers to understand the problem better.







PSU banks have the highest Gross NPAs with Indian Overseas Bank (IOB) leading at 11.00%. Now let us look at the history to understand whether this phenomenon is unique or we had a predecessor. We had faced a similar kind of situation in the late 90s, after the Southeast Asian crisis, India went through very difficult and challenging period. The situation in some cases was worse in India at that time. Interest rates were almost double the current rates. There were instances where corporate loans backed fully by collateral security were charged 18~20% p.a. The equity markets were relatively shallow. We did not have any mechanism like a Sarfaesi Act or a corporate debt restructuring programme but somehow Indian Banks tackled these issues and successfully came out of them.













This is not the first time that Indian banks fared very badly. Historically, NPAs for banking industry as a whole was at 12.00% in 2001.

How 2016 is different from 2001

A close observation tells us that the denominator is the deciding factor in 2016. In 2001, total advances/loans by banking system was a mere Rs. 5.2 lakh crore compared to 2016 figures of approx Rs. 84.0 lakh crores (source: Public sector bank recapitalisation: Allocation inadequate, say analysts ). In addition, the magnitude of impact is very high in absolute terms as all the bad debts and stressed assets are expected to reach Rs. 5.3 lakh crore in 2016.


Role of Corporates in NPAs
Historically the contribution of priority sector vs non priority sector in total NPAs was around 40:60 or as recently 45:55. So attributing the NPAs to only corporates is a bit of exaggeration. For every 100 Rs an Indian bank lends to its customers, Rs. 40 has to go to priority sector which includes farmers, weaker sections, Micro Small and Medium Enterprises (MSME) and companies supporting agriculture segment. Out of the above, NPAs approx Rs. 2.0 lakh Crore was from priority sector and remaining from non-priority sector. Banks help the companies,which defaulted, through Corporate Debt Restructuring (CDR) mechanism if they feel that company’s bad phase is temporary and revival is possible provided some concessions or additional top up loans were given. CDR data as on December 31, 2015 was as below:





Just like the economy has ups and downs so do the industries

A glance at above table clearly indicates that top 10 industries contribute to 80% of all the cases under stress. Iron and Steel sector is performing bad due to global slowdown and did not recover completely after 2008 mortgage crisis. Now due to sluggish offtake by Indian consumers and lack of appetite from Chinese market means they are the worst performing industry as on date. The remaining 4 of top 5 contribute to 40% of all stressed or restructured cases. Infrastructure/EPC/Construction/Engg is a trickiest industry wherein if there is a delay in execution of the project, the project wont be economically feasible.

 The main problem lied with previous government when many projects were struck for want of clearances i.e., environmental, right of way, local bodies etc etc. Previous government and current government are not doing anything fundamentally to sort out these problems. As a result, projects were delayed but the companies have to service the interest on loans/working capital taken from banks. This is like a catch-22 situation. Banks lent money assuming that the projects would be completed on time and the principal and interest will be serviced back by the company whereas the same did not hold true at ground level.


In hindsight, we could say that banks should not have lent to these companies but the pressure on banks to show the growth was so high during that time that all were lead to same traps and struck with same stressed accounts. In a mammoth amount of Rs. 5.0 lakh crore of stressed assets there will be some scams but not all of them come under the same.
 Unless the government takes fundamentally different approach to solving the environment, we are looking at the barrel like situation in coming months.

Image Credits:, Reserve Bank of Infia and Corporate Debt Restructuring cell