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While both bad assets and loan restructuring by the banks have shown a secular rising trend over the last few years, bank wise data will show the distribution is skewed. According to latest data compiled by the finance ministry, public sector banks have a major share of the non-performing assets as well as recast loans.
As on September 30, 2014, stressed assets in terms of gross advances for government-owned banks were at over 12.5 per cent while in case of private sector banks the ratio was below 5.5 per cent. Bankers often say, to which the government also seems to agree, that the reason for rising NPAs is due to falling economic growth.
“NPAs have risen to 5.32 per cent (provisional) as on Sept 2014 in respect of PSBs ... due to sluggishness in the domestic growth during the recent past, slowdown in recovery in the global economy and continuing uncertainty in the global markets,” said a note prepared by the finance ministry that was circulated among government bank chiefs for a meeting held last week.
If sluggish growth and global factors were true, then why it is not reflecting in private bank’s books?
Clearly, there is more to the theory of slowing economic growth. Post the 2008 crisis, private banks have adopted stricter loan sanctioning mechanism and was cautious in loan disbursement in the years when economic growth was slowing down. On the other hand, some of the public sector banks recorded credit growth of 35 per cent in 2013-14 while the overall credit growth was 15 per cent!
Most of the loans given during the past two years are now coming up for restructuring. Debt restructuring is a legitimate activity. It is the tendency of banks to recast an unviable account to avoid NPA classification and leave it to the next chief executive who will take charge in few months. This process is now being questioned.
If an account becomes an NPA, it requires 15 per cent provisioning, while a restructured asset needs 5 per cent provisioning. From April 1, 2015, banks will forgo this forbearance as banks have to classify all recast assets as NPAs and have to make provisioning accordingly. Bankers have been asked to extend the forbearance period for one more year.
“...forbearance is ostrich-like behaviour, hoping the problem will go away. It is not realism but naiveté, for the lesson from across the world is that the problems only get worse as one buries one’s head in the sand,” RBI governor Raghuram Rajan said in a speech at Anand, Gujarat yesterday.
Clearly, the former chief economist of International Monetary Fund is in no mood to postpone the inevitable. And rightly so!
