Bad Loans and Banking sector in 2021 | UPSC

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.

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.

• 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.

• 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.

• 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.

• 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.