Bad Loans and Banking sector in 2021

Bad Loans and Banking sector in 2021 | UPSC

      HEADLINES:

A rocky road for the banking sector in 2021

      WHY IN NEWS:

The volume of bad loans in the system declined in the September quarter.

SYLLABUS COVERED: GS 3: Economy

      ISSUE: 

So why is the RBI worried now? The ability and willingness of banks to lend is critical for businesses and the economy to grow

BACKGROUND

  • After losses in two consecutive years, India’s scheduled commercial banks turned profitable in 2019-20.
  • State-run banks continued to bleed for the fifth year in a row, but their losses were much more stifled.
  • The Reserve Bank of India (RBI) reckons that the first half of 2020-21 saw even greater improvements in banks’ vital statistics, with non-performing assets (NPAs) falling to 7.5% of outstanding loans by September 2020.
  • The RBI attributed this to the resolution of a few large accounts through the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016.

The fresh slippages in loan accounts dipping to just 0.74%

NPAs AT HIGH LEVELS

  • Over the course of 2019-20, India’s banks were on the mend from a precarious position in March 2018, when bad loans on their books peaked to over ₹10 lakh crore — around 11.5% of all loans.
  • Former Chief Economic Adviser Arvind Subramanian had called India’s ‘twin balance sheet problem’ in the Economic Survey for 2016-17.
  • He had sent banks down a slippery slope, beset by dangerously high levels of non-performing assets.
  • A large part of the problem started in the latter half of 2010s, for post recession development ; several large corporates overzealous in their investment ambitions, thus over-leveraging themselves in the process.

And lenders, led by public sector banks, fuelled these plans through easy money on credit

  • The problem was particularly acute in the infrastructure sector, where high-stakes bets on several projects unravelled as growth (and demand) fizzled out following the global financial crisis of 2008.
  • This vicious cycle was interrupted to an extent by the IBC, which, along with tighter recognition norms for bad loans, helped correct the course over time.

A DECLINE IN BAD LOANS IS GOOD NEWS. BUT IS IT THE REAL PICTURE?

  • The problem is that the COVID-19 pandemic and the national lockdown enforced to curb its spread upended businesses and revenue models across industries, just as it did in the rest of the world.
  • But unlike most of its peers, India’s economy had been declining sharply even before the emergence of the virus.
  • The reason bad loans and insolvency proceedings have not surged as multiple businesses went bankrupt.
  • It took millions of employees with outstanding retail loans down with them, is the series of regulatory forbearance steps taken by authorities to help them tide over this unprecedented crisis.

Interest rates were cut after the onset of the pandemic, a moratorium was offered on loan instalments due from borrowers, and liquidity was infused into the system to keep the wheels of the economy moving

  • At the same time, the invocation of the IBC was suspended for loans that went into default on or after March 25, when the lockdown began.
  • While this suspension has now been stretched till March 31, 2021, a loan restructuring window for borrowers was closed in December 2020.
  • Despite all this, life support in the form of adequate credit flows to some productive and COVID-19-stressed sectors has been deficient.
  • More worryingly, the RBI believes that a real picture of the state of borrowers’ accounts will emerge once these policy support measures are rolled back.

WHAT EXACTLY HAS THE RBI SAID ABOUT BANKS’ HEALTH?

  • The central bank is simply repeating the famous Warren Buffet aphorism — “Only when the tide goes out do you discover who has been swimming naked”.
  • The modest GNPA ratio of 7.5% at end-September 2020 veils the strong undercurrent of slippage.

Given the uncertainty induced by COVID-19 and its real economic impact, the asset quality of the banking system may deteriorate sharply, going forward

  • The data on gross non-performing assets (GNPA) of banks are yet to reflect the stress, obscured under the asset quality standstill with attendant financial stability implications.

GNPA
Gross NPA is the term used by commercial banks that refer to the sum of any unpaid debt, which is classified as non-performing loans.

  • Commercial banks offer loans to their non-honored customers, and financial institutions are required to classify them as non-performing assets within ninety days because they do not receive the principal amount or net payments.

      IASbhai WINDUP: 

INDIA’S HOPES FOR A BOUNCE-BACK IN THE ECONOMY

  • Simply put, banks’ ability to lend is critical for businesses and the economy to grow.
  • A deluge of bad loans impairs banks’ ability and willingness to lend, as has been evident in bankers’ aversion to risk in recent years.
  • It is safer to park their funds in government securities, and public sector banks, that have seen a surge in deposits after the recent troubles at co-operative and private lending banks.

Currency with public surged in response to the COVID-19 induced dash for cash while solvency issues related to a private sector bank also brought about some reassignment of deposits

  • Latest data for November suggest a slight uptick in bank credit flows, but lending to industry as a whole still shrank 0.7%.
  • While several private lenders have raised buffer capital to offset shocks from potential loan defaults, some large state-run lenders have announced plans to raise resources in a staggered manner.

WHAT HAPPENS NEXT?

  • The central bank has said that the Financial Stability Report (FSR) — which should have been released by now in the usual course of business — will be “released shortly”.

This report shall present an updated assessment of the gross NPAs and the capital adequacy of banks “under alternate macro stress test scenarios

  • For now, as the central bank has said, the restoration of the health of banking and non-banking financial sectors depends on the revival of the real economy and how quickly the animal spirits of entrepreneurship return.
SUGGESTED READING : BANK FAILURES 
     SOURCES:  THE HINDU | Bad Loans and Banking sector in 2021 | UPSC 

 

DISCOVER MORE : GENERAL STUDIES-III

If you liked this article, then please subscribe to our YouTube Channel for Daily Current Affairs , Editorial Analysis & Answer writing video tutorials. You can also find us on Twitter and Facebook.

11 Shares:
You May Also Like