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Indian banks have proved to be brave essential service providers during the Covid-19 pandemic. Customers are happy but the banks have suffered severely as the lockdown impacted credit delivery and eroded asset quality. Over the last seven years, banks were cleaning up their balance sheets, following the recommendations of the RBI's asset quality review for stressed loans. The incidence of non-performing assets (NPA) was on the wane and then came the pandemic, distorting all earlier equations.

 

Indian banks are feared to witness a sharp rise in their stressed assets in the current fiscal as slower economic activities due to the coronavirus pandemic is affecting debt servicing capabilities of borrowers. In its report, 'For Asia-Pacific Banks, COVID-19 Crisis Could Add USD 300 Billion To Credit Costs', S&P Global Ratings estimated that Indian banks’ NPA ratio could go up by 1.9% and the credit cost ratio by 130 basis point in 2020.

 

This has happened at a time when helped by better recoveries and declining slippages, overall net NPA of the Indian banking sector was falling. The ratio of net NPA to advances declined from 11.2% in March 2018 to 9.1% in March 2019. The lockdown followed by the spread of Covid-19 has now reversed the trend and the asset quality pressure for banks and non-banking finance companies (NBFCs) is expected to rise in the current year, notwithstanding recent measures taken by the central bank.

 

What led to the rise in NPAs

 

The issue of rising NPAs in the Indian banking sector has become the subject of much deliberation of late. The Standing Committee on Finance on the banking sector observed that banks’ capacity to lend has been severely affected due to mounting NPAs.

 

As of March 31, 2019, provisional estimates suggest that the total volume of gross NPAs in the economy stood at `9.36 lakh crore. About 79% of these NPAs were accounted for by public sector banks. The share of PCBs was as high as 88% in 2015-16. In the last five years, gross NPAs as a percentage of total advances of banks have increased from 3.8% in 2013-14 to 9.1% in 2018-19.

 

The question is that what were the reasons behind the increase in NPAs? Some of the factors leading to the rise in NPAs are external, like decreases in global commodity prices or fall in the value of the rupee against the dollar leading to slower exports and in turn, lower cash flow that caused borrowers to skip payments to banks. Some are more intrinsic to the Indian banking sector.

 

The larger part of the loans now classified as NPAs originated in the mid-2000s when the economy was booming, touching 10% GDP growth and business outlook appeared to be very positive. Encouraged by the boom, ‘Corporate India’ ventured into new areas and also increased existing capacity with bank loans which were available more easily than ever before. But as the economic growth slowed down following the global financial crisis of 2008, the finances of many of these corporations tumbled and their repayment capacity decreased. This contributed to the spiralling rise of stressed assets.

According to Raghuram Rajan, the former governor of RBI, one of the important reasons for NPAs was over-optimism after the initial success of public-private partnerships (PPPs) in infrastructure projects during 2006-08 leading to an explosive expansion without due diligence. The slower economic growth after 2008 meant that traffic and industrial demand were far less than projected, resulting in a fall in revenues. This was aggravated by delays in land acquisition and non-availability of gas and coal for power plants.

 

The alleged action by banks and promoters to hide the rise of NPAs and allow fresh loans were purported to be factors that increased NPAs. Further, there have also been frauds of high magnitude that have contributed to rising NPAs.

Rising non-performing assets of banks (Rs crore)
			As % of advances
Year	GNPA	NNPA	GNPA	NNPA
2013-14	263015	98693	3.8	2.1
2014-15	322916	175841	4.3	2.4
2015-16	611607	349814	7.5	4.4
2016-17	791800	433121	9.3	5.3
2017-18	1039679	520679	11.2	6.0
2018-19	936474	355076	9.1	3.7
Source: Report on Trends and Progress of Banking in India  - RBI

 

Contrarian view of NPA story

 

It might be, as suggested by Rajan, that over-optimism about the future market and big loans by industrialists in the mid-2000s were some of the prime reasons of NPA growth. But then, were not long-winded workings of the bureaucracy, delays in land acquisition, absence of or uncertainty in policies and politically inspired agitations to be equally blamed? These factors often delayed project implementation, increased the project cost, and raised the unit cost of production, eroding the price competitiveness of the products. 

  

Industries and enterprises across the spectrum become sick sometimes and would fail to repay their loan installments. Banks would classify the loan as NPA as per defined norms and the government would be brought in to recover it. But what about the money that promoters invested in good faith in the project which then became a part of the asset? Certainly not all promoters take loans to siphon off to other purposes.

 

The prolonged downturn in the economy and falling commodity prices contributed to the growth of NPAs in a greater measure. It is, however, ignored that long delays and gestation periods of several infrastructure projects caused distress in the banks’ assets and led to the mounting of NPAs.

 

The failure of the road, bridge, coal and power projects, accounting for a major chunk of the NPAs, can’t be due to promoters’ inefficiencies alone. The governments can’t absolve themselves of their responsibilities. Indecision to allot coal blocks in time, for example, has proved to be a major hurdle for many private sector thermal power projects.

It is important to differentiate between wilful defaulters and unwilling defaulters. There are a number of borrowers who have turned defaulters due to unhelpful circumstances such as problems in marketing of products, cost over-run, failure to procure input or sudden increase in input costs.

 

Fraud in the banking sector

 

Understandably, there are genuine industrialists and they account for the larger part of the group who borrow funds to finance their projects. But there are others who take loans with ulterior motives and never pay back the bank.

 

The number of fraudulence acts in the banking sector has increased sharply of late deteriorating banks’ asset quality. Indian banks detected `71,543 crore worth of frauds in 2018-19 which was more than the recapitalisation package of `71,000 crore allocated by the government to revive the health of public sector banks. The losses incurred saw an 72% rise from the previous year that witnessed the most infamous banking fraud in India’s history where Nirav Modi siphoned off thousands of crores from the Punjab National Bank in 2018.

 

The point of concern for regulators and policymakers came from the fact that banks take an average of about two years to detect frauds. Large frauds of above `100 crore take banks nearly four and a half years to detect - making it difficult to bring the concerned parties under law.

 

Bank frauds based on date of reporting
Year	Number	Amount (Rs crore)
2014-15	4639	19455
2015-16	4693	18699
2016-17	5076	23934
2017-18	5916	41167
2018-19	6801	71543
Source: Report on Trends and Progress of Banking in India  - RBI

 

The government admits that the occurrence of frauds was enabled largely by laxity in the financial system and promised to take comprehensive steps for reduction of frauds and their timely detection. As a proactive measure, the government decided to take legal action against bank officers who were involved in these frauds.

 

Accordingly, more than 2,500 cases have been on trial since 2018 and the numbers have not decreased in 2019. In 2019, among the 136 cases registered, 143 were convicted, while in 2018 among 148 cases registered, 137 officials were convicted. However, the number of ongoing trials has reduced to 2,633 from 2,673 cases, with only 40 cases being resolved last year.

 

This had a negative impact as the fear of the Central Vigilance Commission made many bank officers wary of sanctioning loans. Despite several steps taken by the government and RBI to expand credit to boost consumption, senior officials of public sector banks were investing heavily in government papers like treasury bills, considered the safest investment avenues, depriving the economy of necessary liquidity that was essential for boosting consumption. Thankfully, the government has now decided to protect honest bank officers from vigilance cases for their bonafide decisions.

 

Measures taken to curtail NPAs of banks

 

Over the years, the RBI has issued various guidelines to tackle the issue of stressed assets of banks. These included introductions of certain schemes such as Strategic Debt Restructuring that allowed banks to change the management of the defaulting company and Joint Lenders’ Forum, where lenders came up with a resolution plan and voted on its implementation. After the enactment of the Insolvency and Bankruptcy Code (IBC), the RBI substituted all the specific pre-existing guidelines with a simplified, generic, time-bound framework for the resolution of stressed assets. In the revised framework which replaced the earlier schemes, the RBI put in place a strict deadline of 180 days during which a resolution plan must be implemented, failing which stressed assets must be referred to the NCLT under IBC within 15 days. The framework also introduced a provision for monitoring of one-day defaults, where incipient stress is identified and flagged immediately when repayments are overdue by a day.

 

		NPA recovered (Rs crore)
Recovery channel	2014-15	2015-16	2016-17	2017-18	2018-19
Lok Adalat	984	3200	2300	1811	2816
DRTs	4208	6400	10300	7235	10574
SARFAESI Act	25600	13200	25900	26380	41876
IBC	0	0	0	4926	70819
Total	30792	22800	38500	40352	126085
Source: RBI

 

The strict provisioning yielded results and the IBC succeeded in recovering substantial NPAs over the years. Recovery of stressed assets improved during 2018-19, propelled by resolutions under the IBC, which contributed to more than half of the total amount recovered.

 

The lockdown has changed the NPA recovery perception and in a major relief for corporate borrowers, hit hard by the halting of economic activities, the government has decided to amend the insolvency law to suspend the ‘up to one-year provisions’ that trigger insolvency proceedings against defaulters. Further, the government plans to bring an amendment in IBC that would pave the way for banks to restructure loans.

 

These are welcome developments but the promoters often find IBC provisions harsh. They feel that Section 29A of the IBC needs to be removed so that promoters who have been victims of circumstances (and who are not frauds) can bid for their own distressed firms during the resolution process.