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