India bad loans currently have soared to whopping Rs 9.5 lakh crore. It’s not just a big number, it’s a big monster that is eating away India’s economic growth. IMF in a report said India’s key banks appear resilient, but the system is subject to considerable vulnerabilities. “The financial sector is facing considerable challenges, and economic growth has recently slowed down. High non-performing assets (NPAs) and slow deleveraging and repair of corporate balance sheets are testing the resilience of the banking system, and holding back investment and growth,” PTI quoted IMF as saying.
IMF’s Stress tests show that while largest banks are sufficiently capitalised and profitable to withstand a deterioration in economic conditions, a group of public sector banks (PSBs) are highly vulnerable to further declines in asset quality and higher provisioning needs
How bad India’s bad loans problem is
In India, liquor baron Vijay Mallya became a wilful defaulter of Rs 9,000 crore and Sahara’s Subrata Roy failed to pay Rs 36,000 back to banks, but country’s bad loan story does not end with these high-profile cases; it is far worse — worse than China. In 2016, India’s loan defaults were at 9.2% of the total gross loans, while that of China stood at just 1.7%, according to the World Bank data on nonperforming loans.
To deal with India’s rising bad debts, India introduced Insolvency and Bankruptcy (IBC) Code in May 2016, consolidating the existing framework by creating a single law for insolvency and bankruptcy, which is expected to ensure time-bound settlement.
In June, the Reserve Bank of India (RBI) identified 12 accounts for immediate insolvency, while 23-25 accounts have been sent to NCTL in December after they failed in debt restructuring. About five companies including biggies like Jaiprakash Associates and Videocon have not been sent been to NCTL yet as the resolution is expected.
When it was found out that promoters of companies were trying to capitalise on loopholes in the IBC, it last month amended the law through the ordinance route, which has been challenged in the Punjab and Haryana Court. The ordinance barred wilful defaulters, people associated with non-performing assets, or those who are habitually non-compliant from the bidding process during insolvency. The ordinance plugged the loophole in the Insolvency law, which allowed promoters to re-purchase their stressed assets at a discounted price, which was a “moral hazard” for the banking system, former SBI chairman Arundhati Bhattacharya said.
In a major step to bring in reforms to India’s ailing banking system, the government in October announced an unprecedented Rs 2.11 lakh crore for recapitalisation of banks over the next two years in a bid to clean banks’ books and revive investment in a slowing economy. Of the 2.11 lakh crore, 1.35 lakh crore will be from front-loaded recapitalisation bonds and remaining 76,000 crore from budgetary allocations and market raising.
Why India’s bad loans problem is so bad
Viral Acharya recently argued that before the IBC and in the absence of an effective, time-bound statutory resolution framework, various schemes were introduced by the Reserve Bank to facilitate viable resolution of stressed assets were cherry-picked by banks to keep loan-loss provisions low rather than to resolve stressed assets.
India’s bad loans have soared to Rs 9.5 lakh crore and the pile-up happened because defaulters were not dealt strictly in the past. In fact, sometimes, bankers even resort to providing additional funding to defaulters to repay previous loans.
Former RBI chairman Raghuram Rajan had pointed out that there are many sick industries but no corporate honcho is “sick” (sic). We perhaps have the biggest example: Vijay Mallya. Recently, Uday Kotak said what loan defaulters really needed was the fear of losing the company. “For the first time, founders fear losing control of the company if dues are not paid,” Uday Kotak said.