Shishir AsthanaMoneycontrol Research
New non-performing assets (NPA) of banks are being added at a faster pace than older ones are being written off or restructured. According to media reports nearly Rs 80,000 crore of gross NPAs were added to the books of public sector banks over the September-ending quarter as compared to Rs 59,547 crore of loans written off by public sector bank in the entire previous fiscal.
Total NPAs now stand at Rs 6,30,323 crore as compared to Rs 5,50,346 crore in June 2016. Why the number is a serious issue can be judged from the fact that it is well above the net worth of public sector banks, which stood at Rs 4,91,706.2 crore in March 2016.
Worst still is the fact that there is no immediate solution to the NPA problem. In a written reply to the Rajya Sabha, Minister of State for Finance Santosh Kumar Gangwar said that the government had taken sector-specific measures (for infrastructure, power, road, textiles, steel etc.) where the incidence of NPAs was high.
The government has introduced an amendment to the Securitisation and Reconstruction of Financial Assets, Insolvency and Bankruptcy Code (IBC) and the Recovery of Debt due to Banks and Financial Institutions (RDDBFI) Act in the hope that the NPA issue will be resolved fast.
However, when it comes to implementation, there are serious issues on the ground which have kept NPA levels high.
Here are five reasons why NPAs are unlikely to come down anytime soon.Ticket size:
The structure of NPAs is acting as a hindrance this time around. Unlike in the past where NPAs were largely in the small and medium enterprises, this time, conglomerates are affected. Broking firm Religare held a conference on Navigating India’s NPA crisis that highlighted the reason behind the increasing NPAs. As against most of the toxic assets being in the range of Rs 100 crore to Rs 1,000 crore, this time around the NPAs are in capital-intensive companies with loan ticket sizes upward of Rs 5,000 crore. Reluctant banks:
The loan ticket size results in hesitation on the part of banks to recognise them. A large part of the blame for the mountain of NPAs falls on the public sector banks’ doors. They adopted a wait and watch policy and recognised toxic assets three years too late. A Religare report says that banks have been funding stressed corporates to service interest and tried to brush the problem under the carpet. Living on a prayer:
Even after failing to try to wish away the problem, banks have not been able to aggressively sell stressed assets. As one of the speakers at a Religare conference said, one needs to sell an asset when it is sick and not when it is dead. Deals are not materialising as all the stakeholders are not on the same page. Banks are not willing to take large haircuts. Ineffective reconstruction companies:
Asset Reconstruction Companies (ARCs) have largely been unsuccessful in managing the issue despite the huge pile of NPAs. ARCs prefer to buy small to midsize companies with debt below Rs 1,000 crore. The bigger NPAs have few takers. Further, ARCs like to pick up a company which has missed a couple of debt repayments rather than when they are shut and require fresh fund infusion. Even on the smaller ones, negotiations have not moved far as banks dominate the pricing-related decisions.
Lack of ownership: Public sector banks seem to lack a sense of ownership and hence are not taking the initiative to strike deals, says the report. Though many promoters are forthcoming to resolve their trouble, largely on account of succession issues — handing over unhealthy businesses to the next generation — deal are not closing. The success rate in private banks is higher.
Unless banks are able to resolve the NPA crisis they would be reluctant to issue fresh loans or reduce interest rates. Benefits of demonetisation will be subdued unless banks pass them on to the rest of the economy.