NPAs in India: Recovering from the Stress

Rising stressed assets continue to cast a shadow over the financial health of the Indian banking system and as an extension, on the growth rate that can be achieved by the Indian economy. This is clearly evident from the sharp growth in Gross Non-Performing Assets (“GNPAs”) from 5.1 percent in September 2015 to 9.6 percent in March 2017.¹ The higher provisioning for Non-Performing Assets (“NPAs”) in recent years has not only impacted profitability of banks in India, but has also reduced the funds available to customers. As demonstrated in the graph below, 20 public sector banks (excluding State Bank of India) have made provisions of INR 395,839 million (USD$6,169 million), which is approximately 131 percent of operating profits reported for the quarter ending March 2017, with an average GNPAs of 13.4 percent.²

Impairment Woes

Raghuram Rajan, former Governor of the Reserve Bank of India (RBI),³ cited “global financial crisis and malfeasance” as primary factors that resulted in an increase in the level of NPAs in India. Though the financial crisis adversely impacted all sectors, certain industries such as infrastructure, iron and steel, power and textiles suffered due to frequent regulatory hurdles, delays in land acquisition, project cost over-runs and fluctuating commodity prices. Consequently, numerous companies operating in these sectors began defaulting on debt repayments. Over time, these defaults have contributed significantly to the spiraling NPAs. In addition to unfavourable business conditions, dishonest borrowers and unsuspecting lenders have also been major contributors to rising NPAs in India. According to a report published by the Standing Committee on Finance (2015-16),⁴ “diversion of funds by promoters to unrelated businesses and poor pre-sanction due diligence were key reasons for bank loans turning toxic.”

¹ Financial Stability Report, June 2017, Reserve Bank of India
² Financial Results available on the website of Bombay Stock Exchange, India
³ India’s central banking institution, the Reserve Bank of India (RBI), is the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country's banking and financial system functions.
⁴ Report on Non-Performing Assets of Financial Institutions, February 2016