The Centre must take pre-emptive steps to avoid the possibly perilous situation on NPAs
Lending institutions will need to play a key role in sustaining the ongoing economic recovery by bankrolling consumer spending, financing private investments and funding the expanded Government borrowing programme. That’s why the RBI’s Financial Stability Report, which contains the central bank’s prognosis for the financial system and stress-tests lenders’ vulnerability to macro risks, assumes significance. The report sees an ‘uneven multi-speed’ economic recovery taking hold and notes that the risk appetite is returning among consumers and businesses. It flags weak credit growth and excessive global liquidity inflating financial assets as speed-bumps. It also observes that the Supreme Court’s standstill on bad loan recognition could be obscuring the build-up of delinquencies at India Inc, with a high proportion of overdue loans as on August 31, 2020, slipping further by November. This is a warning that far from extending regulatory forbearance on recognition of non-performing assets (NPAs) or tinkering with their definition now, the Centre and the Court need to normalise these metrics quickly, so that timely interventions can be made to salvage borrowers and shore up banks.
The Centre must introspect why public sector banks (GNPAs pegged at 17.6 per cent in severe stress) tend to fare much worse than private sector banks (8.8 per cent) or even NBFCs (8.4 per cent) when put to test; this argues for governance reforms at the earliest. The RBI’s past stress tests have been known to under-estimate the impact on lenders during extreme events. The Centre would therefore do well to heed the warnings in this report and not dismiss it as an academic exercise.