India’s huge pile of toxic loans has declined, but don’t celebrate just yet – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-commentary/indias-huge-pile-of-toxic-loans-is-declining-but-dont-celebrate-just-yet/articleshow/90576699.cms

Synopsis

So, what is leading to such a high piling up of NPAs in banking? The answer is complex, as large and complicated advances have effectively contributed to over 77.9% of these bad loans. What is particularly nerve-racking is that MSMEs are significantly showing signs of severe stress post-Covid. This, even after special restructuring packages were allotted to the industry to the tune of ₹58,000 crore.

Nitin Purswani

Nitin Purswani

CEO, Medius Technologies

Much has been argued, said and written about the odious condition of banks, the piling non-performing assets (NPAs), that need recovering. But to tackle the problem, certain specific numbers need to be looked at. In 2017-18, gross NPAs had piled up to a threateningly high 11.2%. By end-March 2021, it came down to 7.5%. But was there a reason to celebrate? Certainly not.

NPAs had been written off from bank balance sheets, not really recovered. There are further concerns after RBI‘s December 2021 Financial Stability Report (bit.ly/3LqBhju) that warns that NPA levels are very likely to get worse again in the near future.

So, what is leading to such a high piling up of NPAs in banking? The answer is complex, as large and complicated advances have effectively contributed to over 77.9% of these bad loans. What is particularly nerve-racking is that MSMEs are significantly showing signs of severe stress post-Covid. This, even after special restructuring packages were allotted to the industry to the tune of ₹58,000 crore.

Enter in this messy landscape the Insolvency and Bankruptcy Code (IBC). But given the test of time, it has fallen short of key expectations pertaining to timely redressal and effective recovery of the value of assets. In the most recent case resolved under IBC, lenders suffered a 95% haircut. The inefficiency of the code can be witnessed from the fact that there have been haircuts of over 60-70% in many cases that have usually led to humungous write-offs. This state of affairs is largely a reflection of the dilatory and weak legal ecosystem in India that is struggling even after the introduction of IBC.

If this trend is left unchecked, serious borrowers will genuinely be scared away. Thus, the need of the hour is heavy restructuring by GoI and RBI, and ramping up the entire legal ecosystem including the institution of professional resolution.

What has contributed to the major chunk of NPAs or bad loans in India? Several reports bear out that excessive mindless lending, coupled with lax credit standards, have contributed to the problem. Poor monitoring and clandestine diversion or siphoning off funds, too, have played a major role. Corruption, malfeasance and fraud have seeped into the system, rendering the latter weak and inefficient. These, of course, don’t pertain to genuine business failure.

Since excessive mindless lending was a major reason for the NPAs that have piled up, such excessive credit growth needs to be curtailed and avoided. Also necessary is the attention of the bank boards, regulators and credit-dispersing functionaries. Credit growth in the banking sector needs to be closely monitored by the boards so that the rate beyond a certain level is curtailed, or maintained for the sound functioning of the sector. The boards need to act in the capacity of a regulator as well as a stringent spectator whose role is to warn the government about the mindless excessive lending by the sector even if it is being doled out to the infrastructure sector.

The banks should also significantly and effectively improve credit appraisal processes and techniques that could effectively – and empathically – strengthen the monitoring system. This model of credit appraisal is based on assessing the character, capacity and capital of the borrower to cushion the unforeseeable effects of bad loans. Though it might be an arduous task – it is, indeed, tough to evaluate the intent and character of the borrower – if mastered, this will help ward off bad loans that act as a canker for the industry.

A major problem that affects the banking sector is that the information flow from the borrower is often quite scanty, unreliable, and quite often delayed. Thus, monitoring tools to concoct an efficient monitoring mechanism are needed for fast, reliable information flow from borrowers to lenders.

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