After being relieved by the RBI from its regulatory curbs, the Central Bank of India has now set a target to bring down its bad loans to Rs 6,000 crore which will bring its gross NPA ratio below 10% by the year-end. The state-run bank currently has a gross non-performing assets burden of close to Rs 29,000 crore which is nearly 15% of its total loan portfolio. Earlier, the RBI had put business restrictions on the former under the prompt corrective action (PCA) framework.
PCA is a regulatory tool to course-correct lenders. Under this, corrective action entails curbs on high-risk lending and setting aside more money as provisions. The Central Bank of India has been able to dodge six years of drudgery in 2022 as it continued to report losses in the last six years. After appealing three times to the RBI to reconsider its PCA status, the Central Bank of India finally got itself out of the restrictions.
NPA problem of Indian banks
The Indian banking sector has been plagued by non-performing assets i.e. a loan or advance for which the principal or interest payment remained overdue for a period of 180 days. The NPA crisis has been the biggest concern not just for bank managements but also for policymakers as the banking system is the bedrock for a country’s financial health. NPAs impact the profitability of banks and attract higher provisioning compared with standard assets. They also create problems for the economy at large.
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The Indian banking sector is showing signs of recovery with a new report by ratings agency CRISIL predicting that the gross non-performing assets (NPA) of the banks will come down by 90 basis points year-on-year to 5% this fiscal and by another 100 basis points to a decadal low of 4% in the next. This can be attributed to the benefits from the proposed sale of NPAs to the National Asset Reconstruction Company Ltd (NARCL), recovery in the economy after the COVID-19 pandemic, and higher credit growth.
It is not like the banking sector is out of the woods. The CRISIL report maintains that not all segments will perform equally well. The biggest improvement will be in the corporate segment where gross NPAs are expected to fall below 2% next fiscal from a peak of nearly 16% as on March 31, 2018.
The government has been engaged in a clean-up drive in the corporate segment as bank books were put under scrutiny in the last few years. Focus was also put on strengthened risk management and underwriting. This, in turn, has resulted in an increased preference for borrowers with better credit profiles. The relief measures helped contain asset quality deterioration to certain extent in the last fiscal.
Indian banking sector
India has 12 public sector banks, 22 private sector banks, 46 foreign banks, 56 regional rural banks, 1485 urban cooperative banks along with 96,000 rural cooperative banks. From FY18 to FY21, bank assets across sectors soared. Total assets across the banking sector (including public and private sector banks) witnessed an increase to touch $2.48 trillion in FY21.
Banks in India are classified into various types. While the functions of these banks remain the same, the difference arises due to the kind of customers they cater to. For example, the Central Bank of India is regulated by the RBI. Cooperative banks provide short-term loans to the agriculture sector and other allied activities. Commercial Banks operate on a commercial basis and their main objective is profit. Public Sector Banks or PSU Banks are a type of commercial banks. Other categories of banks include Regional Rural Banks or RRBs, Local Area Banks, Small Finance Banks, and Payments Banks.
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Roadblocks in existing mechanism
There are many ways of getting rid of bad debt to clean up the bank books such as insolvency resolution under the Insolvency and Bankruptcy Code, 2016 (IBC, 2016) and ARCs in the SARFAESI Act 2002. Unlike initial success in terms of recovering debts over 50%, lately, haircuts have increased and lenders are able to recover hardly 5-6% of bad debt. Moreover, the disproportionate number of National Company Law Tribunal (NCLT) judges causes resolutions to take more time than specified under IBC 2016.
Analysts believe that there is a need for a sunset clause to the resolution process through bad banks. It is essential to develop time-bound strategies for the resolution of assets, or else the bad bank will only serve as a parking space for bad loans. Further, Bad Banks should have a suitable mechanism in place that can facilitate funding for maintaining the quality of assets till their resolution. While the Indian Banks’ Association has set up a six-member panel to oversee resolution plans of lead lenders, more such panels are required to fasten the resolution process.