How dire is India's bad debts problem and what you need to know about it

How Dire is the Bad Debts Problem in Indian Banks

In recent months, the news reports about India’s bad debts problems have been appearing almost on a daily basis. With the ballooning NPAs or Non Performing Assets (the term used to refer to debts owed to banks going sour), the Central government is grappling with the problem of these liabilities on the balance sheets of the Indian banks.

While the problem affects the public sector banks more, even the privately owned and managed banks such as ICICI have been reporting a surge in their liabilities.

Indeed, the problem of bad debts in India is so dire that some experts are predicting a liquidity and a recessionary crisis soon for the Indian banking sector unless it cleans up its act.

Though the problem of bad debts accruing on the balance sheets is due to the cumulative build up loans going bad taken over the years and especially during the boom years of the last decade, it needs to be mentioned that this continued into the present government’s tenure and hence, political partisanship should be avoided.

This means that there must be a collective political will to solve the problem rather than to point fingers which does not serve the purpose.

Crony Capitalism and Dubious Loans

Having said that, it also needs to be mentioned that the aspect of Crony Capitalism that is responsible for much of the bad debts problems.

For instance, it is common among lenders including the private sector to give in the demands of the politicians and grant loans to dubious borrowers often with poor credit history.

On the other hand, there is a also a nexus between the bankers and the borrowers along with clear indications that lenders very well know in advance that the loans would not be repaid.

In addition, the fact that Indian corporates often borrow more money to repay the debts incurred earlier means that unless there is firmness and resolute will in tackling the problem, it is simply going to be a case of kicking the can down the road.

What the RBI is Doing to Address the Problem

Indeed, until the RBI or the Reserve Bank of India cracking down hard in recent month, there has been precious little action from the regulators though the previous RBI governor did flag concerns about bad debts.

These measures that were mooted in the latter’s tenure included fair accounting wherein bad debts and NPAs are not classified as such and instead, reported in a transparent manner.

This is the reason why suddenly there is so much activity and hectic consultations between the government, the regulator, and the lenders as the new provisioning norms have resulted in the NPAs touching nearly 20% of the total assets held by the PSU (Public Sector Undertaking) banks.

This is a very dire situation with implications for the broader economy since once bad debts touch this percentage; it almost guaranteed that a full blown banking crisis is round the corner.

For some perspective, it is important to note that the European Sovereign Debt crisis and the American Financial Crisis of 2008-2010 were triggered when the levels of bad debts were much lower.

What the Indian Government is Doing

While we cannot say that the government has not acted, it could have done so earlier.

This is evident from the fact that the bad debts accumulated over the years were simply being rolled over without any resolution and it is only now that the government and the RBI is taking them seriously.

On the other hand, the passage of the Bankruptcy and Insolvency Bill means that there is some movement to tackle the problem wherein defaulters’ assets are taken over by the lenders and auctioned to other firms so that some of the monies are recovered.

Moreover, the fact remains that unless there is urgency in such measures, the present state of recovery would not improve as can be seen from the tedious litigation that this process is now stuck in. thus, all stakeholders must come together here and there must be some public pressure as well to prevent a run on the banks.

High Profile Borrowers and Perceptions

Having said that, it must be noted that the High Profile Borrowers and the well connected among them have found a way to bypass the problem of repayment by simply fleeing the country means that such cases exacerbate the already poor perception among the public about the rich and the powerful getting away while they pay the price.

Indeed, even the Demonetization measure that was implemented is now being seen that way in the light of the fact that most of the Demonetized currency found its way back into the system rather than being “extinguished”.

To some extent, there is also the fear of triggering a full blown bank run by not putting out alarmist reports, though the numerous news outlets do come up with stories about this problem from time to time.

Conclusion

Lastly, it is our contention that it is no longer an if, but a when as far as the banking crisis is concerned and hence, it is our suggestion to you as taxpayers that you need to be prepared for the next round and iteration of the financial crisis. While we do not want to sound alarmist, we have nonetheless presented the facts as they are and have also examined the moves to tackle the problem thereby leaving it you to make informed decisions. To conclude, the bad debts problem in India is indeed dire and hence, is better to be forewarned rather than being caught by surprise.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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