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In Focus

October, 11

Skyrocketing NPAs choking Economy

The first woman to head the State Bank of India, Arunadhati Bhattacharya has not been shy of speaking her mind throughout her 4-year tenure. In a recent interview, she acknowledged that “My one regret was that I have not seen the end of the NPA story.” In fact, the new SBI chairman, Rajnish Kumar, in his first letter to the employees, also singled out NPAs as a “top priority”. Keeping the above in mind, a new Reuters report becomes all the more chilling. It states that India’s sour bank loans have hit a record 9.5 trillion rupees (145.56 billion USD). To comprehend just how big this number is, the money involved is larger than the GDP of at least 130 countries, including countries like oil-rich Kuwait.

The mountain of debt was unearthed by an RTI request to the Reserve Bank of India. The request revealed that total stressed assets rose by about 4.5% in the just the first six months of 2017. Stressed loans as a percentage of total loans reached 12.6 percent at end-June, the highest level in at least 15 years. This means that for every 100 rupees lent out, banks will reasonably recover about 87 rupees only. One can expect these numbers to fall further as India is in the midst of an economic slump. GDP growth has fallen drastically, and consumer sentiment has turned pessimistic as per RBI itself.  

Distressingly, the NPA quagmire is most prevalent in capital-heavy sectors like Power, Telecom, Realty and Steel. How can such sectors help grow India’s infrastructure, if they are saddled with gargantuan debt? This has also created a vicious cycle; private players refuse to invest because they would need to borrow, and banks refuse to extend credit because the industries have not paid back funds. This perverse cycle has had the effect of credit beginning to dry up, and private investment slowing. Indeed in an analysis conducted by Gadfly, a four year drought in private sector investment is facing us. The report by Gadfly also bemoans the tendency of the RBI and Finance Ministry to engage in a sustained war of words. The Wire has also released a detailed story tracking India’s bank credit slump, concluding that credit growth slowed by 1.5 lakh crore. With the economy gasping for breath, one can’t help but wonder that even SMEs must be feeling the heat now.

India also has a troublesome mechanism for recovering loans. On an average, India takes 4 years to declare a company insolvent, more than twice the time taken for the same in USA or China. In the event of default, not only does it sometimes take 15 years to recover the money, but the recovery is also a pittance. On average, just 25 paise to the rupee, to be more specific. The new Bankruptcy Law passed in May 2016, aims to address these. It seems that the Indian economy is on the back-foot on all fronts. And the government’s policies have had the opposite effect as needed, escalating the NPA from Rs 2.61 lakh crore in December 2014 to 9.5 lakh crore.  The government is advised to first have some accomplishments, before tooting its own horn.

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