The shocking story of NPAs in India
It is not uncommon to hear in banking circles that non-performing assets, or NPAs, are a part of the business of banking. Some loans will go bad, and that is just inherent in the very nature of the business of giving out loans. This is a fair view, except that theory does not always translate to practice in the manner intended, at least not in the Indian banking sector. This is a sector with a unique efficiency in chasing the small borrowers and letting free the big ones, a true coming to life of that famous quote: “If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem.”
Gross NPAs were 3.9% in FY 2023, down from a high of 11.5% in 2018
Has this ground reality changed in recent times? It would appear so, in the light of a set of news reports in the last few weeks that tell us that the NPAs in the Indian banking sector have fallen dramatically, down to a 10-year low, quoting the RBI’s Financial Stability Report that was released June 28, 2023. The report says Gross NPAs were 3.9% in FY 2023, down from a high of 11.5% in 2018. The period also saw gross advances grow, from Rs. 83.6 lakh crore in 2018 to Rs. 135 lakh crore in 2023, so that falling percentages of Gross NPAs on an increased base of advances may not tell the full story. Yet, the drop in the Gross NPA percentage number is a turnaround of sorts. Citing the data, the RBI report notes: “The Indian financial system, led by a sound banking system, remains stable and supportive of the productive needs of the economy. Aided by robust earnings, adequate capital and liquidity buffers and improving asset quality, Indian banks are well positioned to sustain the upturn in the credit cycle that has been underway since early 2022.”
Strict follow-ups and penal or criminal action where warranted would signal a resolve to come to grips with the problem of rising NPAs, which can of course be genuine business failures but are often tangled with loose governance and the unique Indian idea of “wilful defaulters”
A different picture might emerge if the issue is studied from the numbers of new NPAs that are even now being created in the system. If the old NPA number fell because of huge haircuts and write-offs, and new NPAs continue to be added in the system, then that poses a different set of questions on the what, how and why of the management of NPAs and the protection of what essentially are public funds. All the funds that the banks have belong after all to the people of India, ordinary citizens who provide the capital from their savings to be lent out to businesses, which must invest them to power economic growth.
So, what has caused the fall in Gross NPAs percentage? Robust recoveries would be good. Write-offs would be bad. Strict follow-ups and penal or criminal action where warranted would signal a resolve to come to grips with the problem of rising NPAs, which can of course be genuine business failures but are often tangled with loose governance and the unique Indian idea of “wilful defaulters” – those who can pay back but refuse to do so and continue to roam free.
We are nowhere closer to better assessment, monitoring, supervision, controls and governance systems that the banking sector must work with if it is to be called sound
Consider that Gross NPAs were 5.8% in 2021-22, which translated to a total NPA figure of Rs. 7.44 lakh crore. This number was down from Rs. 8.35 lakh crore at the beginning of the year. The single largest contributor to the lowering of the number was write-offs, which were reported at Rs. 1.79 lakh crores. More significantly, Rs.2.83 lakh crore new NPAs were added in 2021-22, the latest for which data is available.
In fact, in the last five years (2018-2022), the period when Gross NPAs have fallen from 9.2% to 5.8%, the total write-offs have been of the order of Rs. 10.25 lakh crore. In the same period, new NPAs of just under Rs. 20 lakh crore have been added. Year on year in the given period, new NPAs added were higher than the numbers written off or recovered from the Gross NPAs. While the older holes are sought to be patched, newer and probably bigger ones are emerging in the ship. This cannot be a stable let alone a robust vessel to sail the seas.
The very idea of a “settlement” where the defaulter is categorised as a fraudster or a wilful defaulter sends a signal that we are open to a deal, and you can be back for more loans after a short cooling period
The problem of NPAs may not be getting better from a systemic view either. We are nowhere closer to better assessment, monitoring, supervision, controls and governance systems that the banking sector must work with if it is to be called sound. The looseness the numbers suggests and the lack of alarm at the state of affairs signal that NPAs have been normalised and that the system appears to have imbibed the message that this is the way it works in India. This encourages a loose system to get looser, not tighter and more efficient. Signals from the authorities can make a big difference. The willingness to act against at least the wilful defaulters, and to name and shame them, just isn’t there. Instead, the regulator has allowed banks to “undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such debtors.” The very idea of a “settlement” where the defaulter is categorised as a fraudster or a wilful defaulter sends a signal that we are open to a deal, and you can be back for more loans after a short cooling period.
Added to the political-business nexus that plays a powerful influence on public policy, the image it creates if of Indian’s financial institutions rotting and going to seed
All of this may be regular banking parlance but none of this will inspire confidence in the people of India. Added to the political-business nexus that plays a powerful influence on public policy, the image it creates if of Indian’s financial institutions rotting and going to seed. This weakens the fabric of the nation, co-opts only those who can play the game by bending the rules and is a breaker on growth that is good, sustainable and open to all players.
In a nation where small subsidies to deserving citizens are being called to question, where the political debate is deliberately created around stopping these inputs and deriding them as the “revdi” culture, as if the people of India are beggars looking for small freebies, the management of NPAs comes across as a sorry exercise. This is the money of the people of India, and if banks can’t monitor the genuineness of projects and end-use of funds, then the lender and the borrower must both be held to account. Anything short of this is tantamount to robbing the poor to pay the rich – which is how the grossness of Gross NPAs comes across as.
(The writer is a journalist and faculty member at SPJIMR. Views are personal)