NPAs in PSBs: More progress

• HDFC
• 01 Aug 2018
• Knowledge Centre

HDFC, Tester

In what seems to be a breather in the fast-escalating problem of non-performing assets (NPAs) in public sector banks (PSBs) in the country, nearly two dozen lender assigned the inter-creditor agreement (ICA) in July 2018. This was done with the aim of speeding up the resolution of PSBs’ stressed assets under the Rs. 500 crore bracket. It is expected to enable these lenders to come together and address the problem.

 

The options of the setting up of a bad bank or using an asset reconstruction company to solve the burgeoning NPA problem have both been rejected by the Government.

Some Options

 

A bad bank is an agency financed by the Centre with the aim of buying all the of banks’ bad loans at the market price. It was first floated in the US in 1988. Its Indian counterpart was formed in January 2017 when the Economic Survey of India recommended the setting up of a Public Sector Asset Rehabilitation Agency.

 

The greatest advantage of a bad bank is that it involves the monetization of assets, and gives banks the chance to start again. This, in turn, accelerates credit growth and supports the revival of the economy.

 

A panel of bankers was set up by the Centre to examine the viability of the bad bank idea. The main reason behind the Government’s rejection of this route was that it would call for an infusion of funds, and banks had already been capitalized using taxpayers' money.

 

It was for the same reason that the Centre was not keen on the idea of an Asset Reconstruction Company (ARC) taking over state-run banks’ bad loans. An ARC is a financial institution dedicated to the purchase of NPAs or bad assets from banks and financial institutions, enabling them to clean up their balance sheets.

Current Standing

 

The current situation is bleak, as PSU banks alone account for NPAs worth Rs. 8.9 lakh crore. In addition to this, RBI’s Financial Stability Report forecasts that the gross NPA ratio of scheduled commercial banks will rise to 12.2% of total loans in FY19, up from 11.6% in the previous fiscal.

 

It also stated that the 11 PSBs under the central bank’s Prompt Corrective Action framework (PCA) may experience “a worsening of their GNPA ratio from 21% in March 2018 to 22.3% by March 2019.” Under the PCA framework, corrective measures like restrictions on dividend distribution, and curbs on branch expansion and management compensation are adopted.

 

According to a report by credit rating agency Moody’s, the Government's recapitalization plan would broadly resolve the regulatory capital needs of PSBs, but will be insufficient to support credit growth.

Earnings Affected

 

Bad loans have impacted PSBs’ quarterly (Q4 FY18) results negatively, as the central bank increased provisions requirement for bad loans in February 2018. The figure of provisions for the State Bank of India (SBI) and Punjab National Bank (PNB) stood at Rs. 24,080 crore and Rs. 20,353 crore respectively. Only two of the 21 PSBs have posted profits in the quarter under review, namely Indian Bank and Vijaya Bank. The combined losses (of the remaining 19 PSBs) incurred in the quarter stand at Rs. 63,117 crore.

 

Though it may be too early to predict whether the ICA platform will succeed in addressing this situation successfully, it seems like a good start, and a step forward in the NPA resolution process.