Indian Commercial Banks & their Current Scenario

Posted in Finance Articles, Total Reads: 6247 , Published on April 22, 2017

In the financial stability report released by RBI as at end of June 2016, it is expected that gross bad loans at commercial banks in India could increase to 8.5% by March 2017, from 7.6% as compared to March 2016. “The macro stress test suggests that under the baseline scenario, the gross NPA may rise to 8.5% by March 2017,” the RBI noted in the report. “If the macro situation deteriorates in the future, the gross NPA ratio may increase further to 9.3% by March 2017.”

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Government of India and commercial strive hard to clean the balance sheet of banks with positive bottom line. It is a big challenge for the Indian banking sector to curb the NPA’s and at the same time clean the balance sheet. With the supreme court of India, intervening by asking government and reserve bank of India regarding the disclosure of names of defaulters (only 57 borrowers have defaulted on bank loans worth a whopping 85000crores). The pressure is surely mounting on the exchequer.

The question arises is, is it the only NPAs of the commercial banks. What about the restructuring exercises i.e. corporate debts restructuring and strategic debts restructuring entered by banks?

As the Reserve Bank of India treats standard restructured assets as a part of stress assets, but gross NPA’s of the commercial banks does not include the restructured assets of both types i.e. corporate debt restructuring (CDR) and strategic debt restructuring (SDR).

To understand how big, the problem is, one needs to examine the CDR and SDR in relation to the total loans lent by the banking system. The amount stood at 8.20% at March 2016. Remember, this is only the stock of NPAs. There is an equally large stock of restructured loans on the books of banks. A significant chunk of restructured loans has turned into bad debts in the recent months. It may increase if economic recovery doesn’t happen quickly.

According to the progress report stated by corporate debt restructuring (CDR) cell as on 30th June 2016, total number of cases reported by them were 655 amounting to Rs.474002 crores, in which 530 cases worth Rs.403004 were approved. These approved cases are not the part of the gross NPA’s of the commercial banks and out of these how much in future will become NPA is unknown. Banks’s recourse action towards SDR schemes are given the relaxation of 18 months by the RBI. Wherein loan restructured are not treated as non-performing assets and banks are required to make low provision of 5 percent in the most cases. The enables the banks to report lower NPA’s and higher profit at least up to 18 months.

The SDR scheme where banks are taking over the control of the management to turnaround the ailing company, make it financially viable and sell it to the new promoter within the stipulated time to recover the dues. The process is not as easy as it looks and the commercial banks do not possess the necessary expertise to turnaround the companies. As CDR was thought about, is SDR another scheme which is postponing the NPA’s of the banks to later years. The question is yet unanswered that how the cleaning of balance sheet of the commercial banks will happen. The stressed assets are continuously mounting and the schemes as implemented have still not shown the results where the stressed assets could be brought under control.

The present government from time to time was mulling a mechanism to solve the bad loan issue. Allowing banks to acquire core sector assets (steel, power & shipping) and ask state run companies to manage them is another measure thought off by the government. The NPAs are increasing which will lead to a catastrophe in the, mainly the government owned banks. The only way it looks like is to find sufficient capital to fill-up their resources.

The message is clear: Balance sheets needs to be cleaned, stringent measures are required particularly in the public-sector banks. It is the right time for government to think about its privatisation strategy as far as state-run banks are concerned and let them freely compete in the market.


This article has been authored by Kunal Bhalerao from IIM Raipur

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