The rising prices and Reserve Bank’s insistence on repeating the same prescription — raising interest rates — are telling on the health of the banks. Bad loans — non-performing assets — are growing phenomenally. If the trend persists, it would not be a surprise to see a repeat of Lehman-type crash not only of the banks but of the entire economy. The locale this time might be India. In the April-June quarter, gross NPAs rose by almost Rs 5,000 crore. In the January-March quarter it stood at Rs 60,685 crore. It rose to Rs 65,318 crore by June end. This is stated to be the highest rise of bad loans in over five years. If the proper management of the NPAs is not undertaken, it would hamper the business of the banks. If the concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector. It may lead to severe fund crunch. Till 2008-09, the real estate and housing segment contributed highly towards the NPA. As the economy started heating up, other sectors have also started defaulting. The challenges before the banks in India today are the rising NPAs in the retail sector, propelled by high consumerism and lowering of moral standards. The corporate sector, which had shown improvement in their repayments, once again is defaulting owing to the pinch of high interest rates. It is not that all payments are unrecoverable. But as the amounts are mounting, banks would have to consider restructuring loans — euphemism for acceptance of delay in repayment. They have little option. As the economy slows down, less business is generated leading to cash crunch. So there is a different jargon to understand the actual level of bad loans — largely doubtful assets — and it is called net NPA. It has risen by almost Rs 3,000 crore in the quarter ending in June from Rs 24,914 crore in the previous quarter to Rs 27,311 crore. It signifies an increase of 9.62 per cent. One of the major defaulters, of late, has been the small and medium enterprise segment, Bank of India chairman and managing director AK Mishra has said, as they are finding it difficult to service their loans. Overall two out of every three banks are seeing rise in their NPAs. The public sector banks naturally are the worst hit. But some private sector banks, including IDBI Bank, are also not free from the malaise. The percentage change in gross NPA to gross advances ratio and net NPA to net advances ratio over the years states that public sector banks makes more provisions in gross NPA and gross advances as compared to private and foreign banks. Public sector bank managers blame this on RBI guidelines. Earlier, NPAs were calculated manually. Since many banks used to conceal facts, RBI issued instructions to decide it on the basis of computer system generated ‘recognition’. Many bank top officials say that it inflates the reality. Now the system is based on 90 per cent information. By September it would cover 100 per cent. Technically, the September figures would be much higher. There is truth in the assumption because the computer system does not recognise whether the delay is by a day or several months. So the bankers’ assumption that this inflates the gross NPAs may not be incorrect. But when it comes to net NPAs, they do not answer the queries.In short, they agree that the problem is aggravating. The bane of Indian banking system as of now is the high interest regime. Even RBI recognises it. But its insistence on containing inflation in a hackneyed manner through monetary mechanism is causing problem. The RBI prescription is further adding to inflation and also slowing down all other industrial activities. Another fallout of high NPA, according to a study by NR Institute of Business Management, is burdening honest depositors, creditors and other users with high unwarranted fees. This makes banking expensive and ultimately again adds to inflationary pressure. It is also not a guarantee that NPAs would come down. In reality, banks are subsidising defaulters at the cost of others. This may help them in the short-run but in the long-run this is no insurance for a severe breakdown. The banks need to bring down their fees to encourage people to use their services more. Many organisations are looking for alternative route for payments, as bank services have become expensive instruments. This has led to asset quality deterioration, a term that signifies a crunch of funds with the banks. The banks now saddled with high credit burden are awaiting a relief from RBI. They are expecting that as in 2009-10, in the event of the US and European economic crash, RBI would allow them to restructure their loans. That would technically relieve them of immediate gross NPA worries. But that is not a solution for the rising net NPAs. It is difficult to prevent unless inflationary pressures come down, people once again start flocking to the market for buying goods and industrial production picks up. If it does not happen, the meltdown may impact dreadfully.
The Pioneer
As the Reserve Bank of India persists with a monetary mechanism to contain inflation and put the economy back on its growth trajectory, the non-performing assets of banks are rising. If this continues, it will lead to a severe fund crunch
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