A Bad Loan Farce Gets Another Rerun In India

By moderator July 12, 2019 12:58

Recently Reserve Bank of India states that Asset Reconstruction Companies (ARCs) able to recover only 10% of bad loan sold to them. This article deals with the farce of bad loan in India.

About Bad Loans:

  • A Non-performing asset (NPA) or it is defined as a credit facility in respect of which the interest and/or installment of principal has remained ‘past due’ for a specified period.
  • The Crisil report states that System-wide NPAs have declined in fiscal 2019 to 9.3 percent as of March 2019 after tripling to 11.5 percent in the four fiscals till March 2018.
  • State-run banks have been struggling with a it for several years now. By 31 March, the total bad loan of public sector banks stood at ₹8.06 trillion, down by a little more than ₹89,000 crore, or 10%, over a year.

India’s Position in NPA’s:

  • India holds the dubious distinction of having the worst non-performing loan ratio among the world’s major economies, having surpassed Italy.

banking stress

Drastic fall in bad loan significant? ·        Bad loan of public sector banks have shrunk year-on-year but still not recognize bad loan, and postponed recognition by restructuring loans and also by evergreening.

·        When RBI launched an asset quality review, in 2013-2014 that these banks started recognizing a few bad loans. This changed further in mid-2015, when RBI launched an asset quality review, following it.

·         Drastic jump in bad loan from ₹2.27 trillion to ₹8.96 trillion between March 2014 and March 2018.

Reason for increasing of bad loan ·        Write-off of loans from the balance sheet of banks that have been accumulated from 4 years.

·        The technical write-offs as a bad loan that have been written off at the head office level of the bank but remain as a bad loan on the books of branches and, hence, recovery efforts continue at the branch level.

·        A lot of technical write-offs have happened between March 2018 and March 2019, leading to bad loan coming down.

·        Public sector banks started recognizing bad loan nearly four-five years back. In 2018-19, bad loan that had been on the balance sheets of banks for more than 4 years were automatically written off.

·        The total amount of it written off in 2018-19 was nearly ₹1.97 trillion and down by 45%.

Recent Trend in NPA’s a dip in time
Why Bad loan matters ·        Rise in NPA of the banks, it will bring a scarcity of funds in the Indian security markets.

·        Survival of the bank will toughest part for the banks due to the scarcity of fund and the shareholders of the banks will also lose money.

·        This will lead to a crisis of confidence in the market. The price of loans, i.e. the interest rates will shoot up badly.

·        Increasing interest rates will directly impact the investors who wish to take loans for setting up infrastructural, industrial projects, etc.

Eventually, All of this will lead to a situation of low off-take of funds from the security market and it will lead to lower growth rates and of course higher inflation because of the higher cost of capital.

RBI Guidelines to recover Bad loan ·        Lenders should review accounts within 30 days of default and initiate a resolution plan before the default.

·        The guideline also added that all lenders must follow board-approved policies to deal with it.

·        Lenders have to recognize “incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts”.

·        Lenders have to report credit information on all borrowers with aggregate exposure of Rs 50 million or more. They also have to submit a weekly report on instances of default by such borrowers.

·        Resolution plans shall provide for a payment not less than the liquidation value due to the disobedient lenders.

·        It also mentions that for accounts with aggregate exposure above a threshold with the lenders, the resolution plan should be implemented within 180 days from the end of the review period.


Ways to tackle NPA’s: 

asset quality review

Way Forward:

From 2014 to 2018, the total amount of loans written off by public sector banks was around ₹3.17 trillion. Of this, around 14% was recovered previously. This doesn’t sound good. Thus, to overcome the issue of bad loans there is a need for strict norms like fugitive offender bill, Bankruptcy and insolvency code act and timely analysis of bank default cases.

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By moderator July 12, 2019 12:58