DECLINE IN BAD LOANS

After  the bank nationalisation in1969,India has been witnessing phenomenal expansion of banking sector both in geographical and functional spread of financial system.Inspite of quantitative achievements in resource mobilisation and in extending the credit reach, several distortions crept into the banking and financial system over the years,adversely affecting  productivity, efficiency and profitability. As a result not only several public sector banks and financial institutions became weak but also some started to incurr persistent losses. The major causes attributed to poor profitability of the public sector banks were corruption, political and administrative interference, poor work culture,excess trade unionism and poor customer service.Most significant cause for poor performance and low profitability was the accumulation of bad loans or Non Performing Assets.It has been observed that Indian banking sector initially ignored the problem of NPAs till mid 1990s but since global financial crisis in 2009 it got much attention. Another reason for focus on NPAs has been spurt in lending by banks to corporates and infrastructure projects. Obviously the large share of NPAs in Indian banks is mainly caused by large borrowers and poor recovery rates ultimately  in turn impacting the taxpayers and the poor. 

By definition Bad loans or Non Performing Assets (NPA) refers to a loan or advance for which the principal or/  interest payment remained overdue for more than 90 days. An asset becomes non-performing when it ceases to generate income for the bank.NPAs depending on the duration are classified into three . A,substandard asset if it remains as an NPA for a period less than or equal to 12 months. B,Doubtful Assets if NPA remained for more than 12 months. C.On the other hand the NPA is considered as a loss asset or "uncollectible" when its continuance as  a bankable asset is not suggested. However some recovery value may be left as the asset has not been written off either fully or partially. On the other hand Gross Non Performing Assets (GNPA)refers to the total value of Gross Non performing Assets for the bank in a particular quarter or financial year, whereas Net Non Performing Assets (NNPA)accounts for the exact value of Non Performing Assets after deducting specific provisions made by the bank for it.NPAs are generally expressed as a  percentage of total advances.

  To tackle the problem of NPAs Government of India enacted mainly three measures SARFAESI Act, Insolvency and Bankruptcy Code (IBC) and setting up of Bad Bank.  Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002(SARFAESI Act) enabled banks to realize their dues without intervention of Courts and Tribunals and to set up Assets Management Companies to acquire NPAs of any bank or financial agency by issuing debentures, bonds or any other security. The SARFAESI Act made a long overdue legal framework for the recovery of NPAs and consequently RBI had issued guidelines and directions for the registration and operation of asset Reconstruction/Securitization companies. Accordingly there was a decline in Gross NPAs from rupees 70860 crores in 2001-02 to rupees 51820 crores In 2005-06.Quite favourably there was favourable industrial climate to recover more NPAs during 2005-06.IBC was enacted in 2016 for the swift and prompt resolution of stressed assets.  Compared to earlier measures IBC recovery process worked better . Bad loans or NPAs in the Indian banks soared after the Reserve Bank India conducted the asset quality review (AQR) in 2016.RBI identified loans that were in default but were not recognized and borrowers were given time. Bad loans increased at over 10% of all loans in March 2018 and afterwards it declined basically due to large-scale provisioning by banks.After RBI conducted the AQR,banks have made provisions over rupees 16 lakh crores. Better regulation,asset quality review, lot of deleveraging on corporate loans ,implementation of IBC along with increased interest income of banks have improved the balance sheet of commercial banks in India. IBC recovery has been more effective compared to the earlier measures. In fact the profits of commercial banks reached all time peak of rupees 59000 crores in September 2022 ,which is higher than half of profits recorded in September 2021.Similarly the Gross NPAs of commercial banks have declined rapidly from the highest level of Rupees 1036187 crores which was about 11.2% of their Gross assets in March 2018 to rupees 7537835 crores or 5.9% of Gross assets in March 2022 accounting for a six year low level. The Financial Stability Report of June 2022 estimated that the Gross NPAs in India will further decline to 5.3% by March 2023. Despite these achievements, global comparison shows that our NPAs in the banking sector is far higher than both advanced economies and many developing countries.While in countries like South Korea, Canada and Switzerland NPAs averaged less than 1percent, it was between 1-2%  range in Singapore, Australia, Norway, China, Saudi Arabia, Malaysia, USA,UK and Germany. Average NPA for India in the last decade was 6.6% higher than that of Srilanka, Spain and UAE and less than that of Nigeria, Russia, Bangladesh,Pakistan,Italy etc

The sharp decline in NPAs was largely achieved through write off  of loans in the last 5 years ending 2021-22. According to RBI  data banks have written off rupees 1009510 crores over the last 5 years in which public sector banks alone accounted for rupees 734738 crores write offs. Despite the huge write offs the recovery on Non Performing loans were only 1.32 lakh crores or 13.3 % of the loans written off during same period.This creates the distressing problem of moral hazard,because the bulk of the loans are above rupees 5 crores.Similarly while  the public sector banks wrote off 7.34 lakh crores in the five year period they were  able to recover only 0.96 lakh crores .The poor recovery of loans are despite many recovery mechanisms like filing suits in debt recovery tribunal or civil courts or the SARFAESI Act 2002 or IBC and now the newly established bad Bank. In the past losses in public sector banks were periodically made good by the Government through infusion of recapitalization funds eventhough  it was not adding any fresh capital to banking system.Government has infused rupees 310997crores to recapitalise banks during the period 2016-17 to 2020-21 out of which rupees 34997 crores were sourced through budgetary allocation and rupees 276000 crore through issuance of recapitalisation bonds to these banks. Loan write offs are generally undertaken when a particular business not necessarily underlying assets is failing. Causes for failure range from downturn in real economy, technological disruption, change in government policies, cut throat competition, error of judgment, malpractices and corruption. Prudential norms on Income Recognition Assets Classification and Provisioning (IRACP) pertaining to advances have been in force for more than 2 decades now. Ironically Indian banks continue to hid losses for decades. Ironically the  "write offs " investigating today would not have been possible without the policy change made by RBI in 2015 that mandated all banks to come clean on the extent of bad loans they had been hiding in their financial reports.

In fact to improve the financial health of  the public sector banks, the government implemented a comprehensive 4R's strategy-Recognition of non Performing assets (NPAs) transparently, Resolution and recovery of value from stressed accounts, Recapitalisation of PSBs and Reforms in PSBs and the wider financial system. Comprehensive steps were taken under the 4R's strategy to reduce NPAs of PSBs.Prudential framework for regulation, better provisioning by banks recapitalisation, merger led operational efficiency and economies of scale, simultaneously to address the impact of covid 19- Emergency Credit line guarantee scheme (ECLGS) as part of Atmanirbhar Bharat Abhiyaan which partly impacted loans. In any case more stringent monitoring did improve the balance sheet of Indian commercial banks in recent years. Along with periodical asset quality review continuous increase in interest income due to monetary policy repo rate hikes were also responsible for increased profits and decline in the share of bad loans currently.let us hope that more transparency, professionalism better provisioning and regulation will enable banking sector to reduce NPAs further.