Banks have been very cautious in acknowledging that all NPAs have already been classified. But, in the process, the total stressed assets in banks had reportedly reached 12.6% by June 2017—the highest recorded in the last 15 years.
High levels of bad loans have brought down credit growth in public sector banks (PSBs) to historic lows, despite the fact that private banks continue to be aggressive in lending. This highlights the significant role of PSBs in supporting economic growth. Beginning with September 2015 when the Asset Quality Review was launched by RBI to clean up bank balance sheets, the real state of NPAs in banks began to manifest. Even now, it is difficult to estimate if the process of recognition of NPAs in terms of prudential guidelines is complete? Banks have been very cautious in acknowledging that all NPAs have already been classified. But, in the process, the total stressed assets in banks had reportedly reached 12.6% by June 2017—the highest recorded in the last 15 years. The stressed assets in PSBs alone are stated to be 14.5%. As a result, many PSBs are put under a new format of Prompt Corrective Action to bring them back to health. Among the reasons for rise in stressed assets, profligacy in lending to over-leveraged corporate sector steadily at an average elevated level of over 20% during 2007-12 has been one of the prime causative factors for current asset quality mess. It is a matter of greater concern that the menace of bad loans in PSBs has adversely impacted their overall functioning. If corrective actions are not taken now, their sustainability cannot be ensured in the medium to long term.
Impact of IBC
The introduction of the Insolvency and Bankruptcy Code, 2016, is sure to bring some respite, but not too soon. It may benefit in the medium to long-term, but only after absorbing a deep haircut. Once the prescribed period of 180/270 days gets over in the 11 large NPA accounts admitted by NCLT, of the 12 accounts identified and referred at the instance of RBI, banks can look for some relief. RBI’s direction to make 50% provision against NPAs referred to NCLT and ultimate deep haircut in recovery are big challenges for the banks in invoking IBC 2016. The new law of IBC can be a great differentiator in curbing bad loans in the future—IBC can force closure of units if bad debts are not repaid on time. But the consequence of huge bad loans with PSBs is having a protracted debilitating impact on fresh lending, which may prove more disastrous than high NPAs.
Credit growth trends
In this milieu, the credit growth in PSBs has touched a record low growth of 0.8% while private banks continued to post a credit growth of 17.5% during FY17. As a result of morbid credit growth in PSBs, banking industry recorded credit growth of 5.08%—it has been the lowest in banks since 1953-54 when the credit growth was a paltry 1.7%. Consequently, the share of PSBs in bank credit has nosedived from 70.9% in FY15 to 64% by FY17. Whereas, in the same period, the market share of private banks has scaled up from 26.4% to 33.1%. In the process, NBFCs too could increase their market share in credit from 2.7% to 2.9%. Finding the lack of lending appetite of PSBs and more competitive rates of alternate sources of funds, the corporate sector is shifting focus from bank loans to other sources. They began to access funds from bond markets, equity and private equity funds. The sectoral flow of bank credit to industry has come down from `26.24 crore on August 21, 2015, to `26.11 crore on August 28, 2017, instead of rising in normal sequence. When the GDP growth was 7.1% in FY17, such historically low credit off-take can only indicate despair of PSBs. The slackness in demand for credit cannot be justified as other financial intermediaries are aggressively growing credit portfolio. The added pile of NPAs and lack of any specific strategy to dispense credit has exacerbated asset quality woes. In a bid to focus on recovery, PSBs perhaps have remained away from lending much to the detriment of their profitability.
Credit growth & NPA management
PSBs, while grappling with high NPAs, were unable to maintain balance with credit growth. They are, therefore, clearly getting marginalised in the lending space overtaken by other players. The umbilical link between fresh credit growth and management of NPAs is so intense that it is necessary to implement suitable strategies to keep both these business lines intact. Lending and recovery of loans form an integrated function of banks. Any effort to overemphasise on one part of function at the cost of other can jeopardise overall holistic growth and profitability of entities. The trends of credit growth of last three years are a clear evidence of the inability of PSBs to balance the twin functions. With the impact of demonetisation waning fast and GST getting integrated with trade and commerce, the economy is all set to revive in the next few quarters. In such buoyant business environment and ample liquidity, PSBs should aggressively pursue credit growth to make up the lost ground. Besides targeting usual potential areas for credit growth, focus on MSMEs and agricultural enterprises can be the preferred route for faster credit expansion. With differentiated banks spreading fast, the competition for PSBs will increase unless aggressive credit expansion strategies are firmed up. PSBs need to urgently regain lost market position to stay competitive. Living with elevated NPAs is the new normal and it can’t be the protracted reason to desist from lending.
K Srinivasa Rao
Director, National Institute of Banking Studies and Corporate Management (NIBSCOM), Noida.
Views are personal