Even the bare numbers, of NPAs for the banking sector rising from 5.1% of gross advances in September 2015 to 7.6% in March 2016—and possibly rising to 9.3% by March 2017 if ‘the macro situation deteriorates’, and that for PSU banks reaching 11%—are frightening, but the picture gets a lot worse when you drill down further. At an overall level, RBI’s latest Financial Stability Report (FSR), talks of how corporate leverage has gone down. The proportion of leveraged companies in its sample—those with a negative net worth or a debt-equity ratio of more than 2—has fallen from 19% in March 2015 to 14% in March 2016 as has their share in total debt, from 33.8% to 20.6%. While that is indeed good news, it does not square with the way NPAs have risen in the same period or are projected to rise. What that obviously means is that even the existing leverage is too high for firms to be able to service their debt, especially in a situation where sales growth is not growing as fast as is needed—this is flagged as a key concern in the FSR’s corporate stability map. So, even in a situation of moderating leverage, NPAs can continue to rise.
That, in fact, is what a chart in the FSR on the share of large borrowers in the loan portfolio of commercial banks shows—the share of large borrowers is up from 56.8% in September 2015 to 58% in March 2016 and, as a share of gross NPAs, it is up from 83.4% to 86.4%. Indeed, advances to large borrowers that are classified as Special Mention Accounts-1—this is the earliest sign of stressed assets —are up 35% between September 2015 and March 2016. Not surprising then, that the FSR should say ‘the risks to the banking sector have sharply increased since the publication of the previous FSR… a trend analysis … suggests that stability conditions in the banking sector which started deteriorating in mid-2010, have now worsened significantly’. In case the top borrower for banks defaults, the FSR points out, the system-wide NPAs rise from 7.5% to 10.6%—if the top two groups default, this rises to 12.8%. What complicates matters is that promoter-pledged shares in all listed firms on NSE and BSE are up from 11% in March 2013 to 15% in March 2016—since their values have fallen, the collateral banks hold for fresh loans are also down to that extent. Since the bankruptcy law will take its own time to take effect, as the courts-tribunal infrastructure will need to be set up, it is unlikely banks are going to get much relief on this account in the short-term. In which case, the government has to follow through with both increased capital for banks as well as finalise its bad bank strategy—apart from the capital that this also requires, defaulting promoters have to be forced to give up most of the value of their equity; a bad bank in itself has little relevance if promoters are not eased out.