Millennium Post

No end in sight

The bad loan crisis at state-owned banks continues to worsen. These banks have reportedly posted a 56.4% rise in gross non-performing assets or NPAs in 2016. As a result of the recent cash crunch brought on by demonetisation, many small to medium-sized businesses are seemingly unable to repay their loans, raising fears that the situation will not improve anytime soon.

"Asset quality will remain a negative driver of the credit profiles of most rated Indian banks and the stock of impaired loans. Non-performing loans (NPLs) and standard restructured loans will still rise during the horizon of our outlook," said a report jointly penned by international rating agency Moody's and its domestic arm ICRA Ratings. Other reports indicate that the banks may miss the Central bank's deadline to clean up their balance sheets by March 2017, since their efforts were redirected from recovering bad loans to implementing the government's demonetisation initiative.

The Centre's latest Budget provided Rs 10,000 crore for recapitalisation of public sector banks in 2017-18. Experts contend that this is markedly below the Rs 25,000 crore the government had set aside in the previous year. Banks are in desperate need for recapitalisation so that they can start lending to sound companies with smart business proposals, thereby kickstarting economic activity. The onus of repairing weak lenders with necessary capital lies only with the government. Bad loans and NPAs continue to pile up because of prolonged government indifference to them. As a result of these bad loans, new credit was difficult to come by, and investment has stalled. Under the current Modi government, it was expected that these matters would be set right.

Unfortunately, it seems as if there has been little forward movement. In fact, no major debtor has been restructured. Various government schemes to tackle the debt crisis has not borne fruit due to legal, and logistical challenges in implementing them. Moreover, despite the surge in deposits post demonetisation, banks have resorted to parking money in government bonds rather than lending to industries due to the lack of economic activity. There are wrongdoers among the Indian business community who have raised the cost of borrowing for everybody, including the common man. The knock-on effect of these bad debts has been deleterious for the entire economy. It is imperative to note that the major loan defaulters are not the small or medium-sized businesses, but major multinationals like Reliance ADA, Vedanta, Essar, Adani Group, and the Jaypee Group, among others.

For years, Indian banks, especially those in the public sector, have lent rather recklessly to big business without due diligence. Unless structural changes are introduced to the banking sector, especially those in the public sector, this problem will not go away. The lack of accountability shown by large corporate borrowers has compromised India's financial system. By using their political connections and working the overburdened judicial system, these large companies continue to get away without any real punishment.

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