Warning signs, yet again

 What’s worse, the RBI has warned that the pain may not be over anytime soon. Foreseeing a worsening situation of bad loans in the country, the Central bank on Monday announced that the gross non-performing assets of the banks can rise to as high as 9.3 percent in 2016-17 after hitting 7.6 percent in March 2016. Banks' gross NPA had stood at 5.1 percent in September 2015. 

Meanwhile, net non-performing advances as a percentage of the total net advances increased to 4.6 percent in March 2016 from 2.8 percent in September 2015. To the uninitiated, the FSR is a bi-yearly report prepared by the RBI, which details the results of stress tests on bank balance sheets and the backdrop against which the Central bank conducted those tests.

 The significance of this year’s FSR is that the RBI has included its first AQR, which forced banks to mark a large stock of stressed loans as non-performing assets and set aside money to cover the risak of default. According to the report, the top 100 borrowers accounted for 19.3 percent of the system’s bad loan stock. This is a massive jump from just 2.9 percent in September 2015.

The lack of accountability shown by large corporate borrowers has compromised India’s financial system and raised the cost of acquiring credit. By using their political connections and working the overburdened judicial system, these massive corporate entities continue to default on their loans, without paying the price for it. 

Outgoing RBI Governor Raghuram Rajan sensed the deep rot in India’s banking system early on in his tenure. In 2014, he began working on NPAs. One criticism of the Rajan-led RBI is that its call for "deep surgery" came late. It’s hard to gauge the reasons why it took Rajan two years to recognise the rot and take harsh corrective measures. But a CEO is only as good as his accounts department. This is probably why he has not lost any real credibility in the public eye. 

Nonetheless, Rajan decision to clean up the balance sheets of Indian banks has stirred a hornet's nest. Banks have started cracking the whip on Indian companies for repayment of loans. The most affected industrial behemoths could be forced to sell their prized assets to repay their burgeoning debts. Among those industrial behemoths deep in the red, one can list the Anil Ambani-led Reliance Group, Essar, Adani Group, Jaypee and Jindal Steel.

One hopes that Rajan’s successor will continue with the reform impetus he has offered to the banking sector. If his successor fails, it could take the sector and the Indian economy a few steps back. Certain experts, however, feel that Rajan’s uncompromised approach to dealing with debt default did not go down well with the big business interests, leaving the political class they fund uncomfortable and insecure. This raises doubts of whether the next incumbent will follow Rajan's uncompromising path. Whatever maybe the truth, his successor must stay on course. At stake here is India’s future.