India's NPA Challenge & Recapitalisation

Posted in Finance Articles, Total Reads: 316 , Published on 17 February 2018

NPAs or the Non Performing Assets are the loans given out by banks which have turned bad, that is, the borrowers have stopped repaying, either the interest rate or the principal amount & chances for whose recovery are quite low. India’s NPAs have skyrocketed from 53,476 Crores in 2008 to over 9 Lakh Crores by 2017, a colossal 9.3% of the total advances given out by the banks.

In any economy, the banks have to play the major role In credit creation so that sufficient demand exists in the market & the economy is able to grow at a decent pace. When banks lend out money to entrepreneurs, they in turn invest it in their business in order to create jobs who in turn spend money to sustain their life & this is how the economy grows. The multiplier effect is what it is termed. In India, the max advances are given out by the Public Sector Banks, whose size dwarfs any private bank in India by Comparison. Since these are Nationalised Banks, hence the govt of india has a majority Shareholding in it. It is on the govt to make sure that the banks doesn’t derails in its process of giving out loans & uses its capabilities to give out both for priority lending in rural areas & also to other commercial interests.

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In India, after the recession, when the global demand was down & all industrialists were cash strapped, the govt at the centre used its might in order to prod banks to do reckless lending, giving out to virtually any individual without doing much credit paying capacity analysis or other feasibility check. Loans were primarily pressured to be given for infrastructure projects to fund the country’s ambitious 1 trillion dollar infrastructure vision, but since projects like these take long time before they start showing results or the gestation period is low, this has led to over exposure which has now created these Loans which are not giving out any returns. In the World, primarily these projects are financed by long term bonds or multilateral funding agencies, but the problem is these didn’t come hence it was made to be done through banks.

Also, the controversies like the 2G & later the Coal issue led to disastrous consequences. after the detailed report by CAG on how preferences were given to certain individuals while allotting Spectrum Licenses or Coal Blocks, the Hon’ble SC of India had to step in & cancel allocation of these blocks. A large amount of money got stuck and later, when the NDA 2 Govt tried to resell it at premium prices, the companies just didn’t have the appetite to again afford them & as a result, both the sectors have totally collapsed leading to massive NPAs.

Thirdly, Indian Steel Industry took loans in order to expand but the massive dumping by the Chinese throughout the world have made our steel unattractive in the global market and as a result, The entire sector is in disarray, creating more problems for the banks, giving rise to large NPAs. The problem is, now those companies are unwilling to pay/unable to pay & that has resulted in the “dual balance sheet problem”.

Dual Balance Sheet Problem deals with how NPAs have lead to poor balance sheets of banks along with a lot of stuck capital due to which they are unable to create enough lending in the economy or are charging higher interests rate, thereby reducing the demand for credit. Secondly, the balance sheets of the companies are stressed thereby reducing the demand for credit. This has led to a slowing economy, which has been continuously shrinking in its growth rate from the past 6 quarters, from a high of 7.9 to a low of 5.7%. Something is needed to be done to tackle the problem.


The graph shows show the PSBs accounts for the maximum part of the NPA Mess. Public Sector Banks accounts for almost 90% of the NPA Pile, showing just how it can be manipulated by people in power with vested interests in order to ruin an economy, just to please some acolytes. Private Sector Banks, hence are not burdened much by this. Since the growth of credit has been declining YoY, from 10.9% in 2015-16 to 8.1% in 2016-17 according to a Dun & Bradstreet Report, the Govt understood it had to take certain measures in order to inject money in the economy, generate demand & propel growth. During the India Shinning Period when Vajpayee was PM, the credit growth was around 20%, leading to an economy growth rate of 8%+ in 2004, which continued in almost the similar fashion till 2008 (Before Recession).

The current Govt hence has recently taken a decision in the Cabinet to inject 2.11 Lakh Crores through the Recapitalisation route in order to infuse funds and start the credit process again. out of this, 1.35 Lakh crores will be through the issuance of recapitalization bonds while the rest 76,000 crores will come from equity stake sale & a 18,000 crore grant, left of the earlier attempted Indradhanush Plan to restart the banks. This massive figure is almost 20% of the total NPA mess & will go a long way in unclogging the closed channels & generate more money to give out as loans for the economy. the sheer size of the decision can be gauged by the infographic below, its almost the size of India’s largest Public Sector Lender SBI !


The IMF Rules of accounting doesn’t count recapitalization as part of the govt expenses, hence it wouldn’t reflect by increasing India’s Fiscal Deficit & thereby leading to failure of keeping it at 3.2%. The importance & significance of this decision can be gauged from the fact, that the RBI Governor, SBI Chairman, CII & other top Honchos expressed relief that such a massive step by the Govt would help in bringing the banks back on track & generating private investments for the future. Coupled with a 7 Lakh Crores record spending on BharatMala Project & 2.11 Lakh Crores Bank Recapitalisation Fund, the Govt is trying its best to bring the economy back on track, increase the GDP Growth rate by following Keynesian economics “Spend More to Generate More Demand” & hence trying to making sure, they have a saving face before the 2019 General Elections where the state of the economy is going to be one of the biggest poll planks for the PM.


This article has been authored by Abhishek Singhal from MDI Murshidabad



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