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Public Sector Banking is Now in a Bigger Mess

Jan 11, 2017


The break at writing the Diary turned out to be much longer than I had expected. The main reason for it will become obvious in the days to come.

A lot has happened during this period, including the Modi government's defence of demonetisation, which has grown by leaps and bounds. Nevertheless, I thought of giving writing on demonetisation a break for the first piece for the Diary in 2017.

One thing that has got side-lined in the entire discussion on demonetisation is the fact that Indian public sector banks continue to remain in a mess. In fact, as we shall see the mess has only grown bigger in the recent past. As the RBI Financial Stability Report for December 2016 points out: "The stress on banking sector, particularly the public sector banks (PSBs) remain significant... PSBs as a group continued to record losses."

The gross non-performing assets ratio or the bad loans of the PSBs, increased to 11.8 per cent as on September 30, 2016. This is a whopping increase of 220 basis points from 9.6 per cent as of March 31, 2016. One basis point is one hundredth of a percentage.

The overall stressed assets of public sector banks jumped to 15.8 per cent of total loans. It had stood at 14.9 per cent as on March 31, 2016.

The stressed asset figure of 15.8 per cent was obtained by adding bad loans of 11.8 per cent with restructured assets of 4 per cent. This basically means that for every Rs 100 that the PSBs have given out as a loan, Rs 15.8 are in a dodgy territory, on an average.

Out of every Rs 100 of loans made by the banks, borrowers have stopped repaying loans worth Rs 11.8. Over and above that loans worth Rs 4 for every Rs 100 of loans given by the banks have been restructured. A restructured loan essentially implies that the borrower has been given a moratorium during which he does not have to repay the principal amount. In some cases, even the interest need not be paid. In some other cases, the tenure of the loan has been increased.

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This is clearly a reason to worry. Nevertheless, there is a small good sign here as well. Unlike earlier, when banks were using the restructuring route to not recognise bad loans, that doesn't seem to be happening much now. As on March 31, 2016, the restructured loans had stood at 4.9 per cent of total loans. This has fallen to 4 per cent of total loans as of September 30, 2016. Banks are now recognising bad loans as bad loans. The first step towards solving a problem is recognising that it exists.

The increase in bad loans of public sector banks can also be seen in the bad loans figure of large borrowers. The Reserve Bank of India categorises large borrowers as borrowers with an outstanding loan amount of Rs 5 crore or more. The Financial Stability Report points out: "The large borrowers registered significant deterioration in their asset quality."

However, the report does not mention a clear bad loans figure for the large borrowers. As the RBI Financial Stability Report for June 2016 pointed out: "The gross non-performing assets(GNPA) ratio of large borrowers increased sharply from 7.0 per cent to 10.6 per cent during September 2015 to March 2016." This basically means that as on September 30, 2016, the gross non-performing assets ratio or the bad loans of banks would have stood at greater than 10.6 per cent.

If we look at Figure 1, the bad loans ratio for the large borrowers seems to be greater than 15 per cent as of September 30, 2016.

Figure 1:

This basically means that the large borrowers are the ones who continue to create problems for public sector banks. Take a look at Figure 2.

Figure 2:

The large borrowers form 56.5 per cent of the total loans given by banks. Nonetheless, they form 88.4 per cent of the total bad loans of banks. And this is where the basic trouble is. The rate of recovery of bad loans by banks is also not good enough.

As a recent report in The Indian Express points out: "The rate of recovery of non-performing assets (NPAs) was 10.3 per cent, or Rs 22,800 crore, out of the total NPAs of Rs 221,400 crore during fiscal ended March 2016, against Rs 30,800 crore (12.4 per cent) of the total amount of Rs 248,200 crore reported in March 2015, data from the Reserve Bank of India (RBI) has said."

Indeed, what is worrying is that the RBI points out that the bad loans of the PSBs could increase further. As the report points out: "Among the bank groups, PSBs may continue to register the highest GNPA ratio. Under baseline scenario, the PSBs' GNPA ratio may increase to 12.5 per cent in March 2017 and then to 12.9 per cent in March 2018 from 11.8 per cent in September 2016, which could increase further under a severe stress scenario."

Interestingly, the June 2016 Financial Stability Report had pointed out: "Among the bank-groups, PSBs may continue to register the highest GNPA ratio. Under the baseline scenario, their GNPA ratio may go up to 10.1 per cent by March 2017 from 9.6 per cent as of March 2016.

However, under a severe stress scenario, it may increase to 11.0 per cent by March 2017."

We have already crossed the severe stress level in September 2016, something which was forecast only for March 2017. This basically means that the government will have to keep pumping more and more capital into these banks in the years to come in order to keep them going. And that means a lot more money of taxpayers will essentially go down the drain.

Postscript: I would like to thank all readers who supported my recent petition to the President. I am in the process of planning the dispatch of the responses received to the President.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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10 Responses to "Public Sector Banking is Now in a Bigger Mess"

Umesh Dhargalkar

Jan 13, 2017

The Large Borrowers is the root cause for the bad loans (NPA) problem in PSBs. The tough recovery measures backed by adequate legal support is the need of the hour. Further more I doubt whether it is a cover up for possible privatisation of PSBs ?


Dileep Brahme

Jan 11, 2017

Mr Vivek Kaul has recorded many observations from RBI reports.The article only highlights the helpless situation, known to a common-man. Whosoever may be in RBI or in the Government has to act tough to bring-down the NPAs.Since Nationalization in 1969, PSBs have little freedom to decide their own lending policy. Mr Kaul has rightly figured out Large borrowers -- only one factor. But what about advances/loans given to farmers/ Sugar/agricultural factories yarn weavers, to taxi-truck owners, retailors, cottage industries/SSI? These have been waived off perpetually.The article does not appear to delve into the root causes that are adding NPAs year after year. The article can be resourceful only if Mr Kaul outlines the Remedial Measures for PSBs to come out of the mess, considering his learned experience.

Like (1)

D M Jha

Jan 11, 2017


"This basically means that for every Rs 100 that the PSBs have given out as a loan, Rs 15.8 are in a dodgy territory, on an average."

"This basically means that the government will have to keep pumping more and more capital into these banks in the years to come in order to keep them going. And that means a lot more money of taxpayers will essentially go down the drain. "

The abovementioned lines sound as something PSB bankers committed a wrong thing. Of course the thing is wrong but that has not been given out by banker rather there are n number of factors for this mess.

Like (1)


Jan 11, 2017

Hi Vivek,

From you article - Public Sector Banking is Now in a Bigger Mess, do we consider it as a hint to move out the money invested as Fixed Deposit in the public sector banks to India Post Office Fixed Time Deposit,as the FD money invested above 1Lac is insured for only 1Lac. I believe that Post Office Fixed time deposits are 100% safe compared to the 1Lac insurance offered if any bank goes bankrupt, not aware about any NPA or GNPA issue happening in their. Please do write an article posting your views about putting our hard earned money in at least one safe place i.e India Post Office.

Thanks & Regards,

Like (1)

Neeraj Mishra

Jan 11, 2017

Thanks for emphasizing the bigger challenge for PSB s.

It would be illuminating, if we get the historical data of yearly GNPAs and government write offs per Financial year; since the year 2000, from opening up of the economy by Dr Manmohan singh.

This may highlight the crony capitalism perpetrated by both UPA and NDA regimes.

Like (1)

satish Dabholkar

Jan 11, 2017


The main reason for stress in government banks is inadequate staff.The number replaced do not tally with retired staff.The banking sector has increased manifold but staff compare to each previous year is get reduced as there is no replacement recovery of goverment banking sector atleast 50% more staff is required than what is present.
Your representation for this is required not for NOTBANDI

Like (1)

N. Cama

Jan 11, 2017

The article basically said that the banking sector has made some very bad lending decisions; that the PSBs have done the worst job; that big borrowers are by far the worst defaulters; and that things will only get worse. Surely, that's hardly ''news'' to anyone in India! If there had been some attempt to identify core reasons for this situation, it might have been interesting. And just vaguely bundling in references to demonetization, seems to be a sly effort at implicating demonetization for plain bad lending, bad monitoring, and bad recovery practices by banks. What was the point of the article?


Like (1)

MVR Sastry

Jan 11, 2017

Sir, if the loans/advances of the banks are strictly recognized as per the norms
prescribed by RBI ( 90 days criteria for repayment of instalments and interest),
the GNPA will be not less than 25% of total advances.By resorting to restructuring
of stressed assets under different nomenclature apart from showing NPA's as a percentage of Total loan portfolio including incremental advances , Banks are trying to downplay the real scenario. If RBI/GOVT appoints a team of professionals to scan thro the big advances of Banks , the real picture will emanate once for all.

Like (1)


Jan 11, 2017

The mess in PS banks is not due to ordinary loan borrower. It is due to the corruption by bank officials who sanction huge loans to corporate without valuating the assets whereas a common man or a farmer has to struggle to get a home loan or a crop loan.

Like (1)


Jan 11, 2017

Most loans sanctioned during congress raj.

Like (1)
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