»Vivek Kaul's Diary

Even RBI is Not Sure of How Deep Bad Loans of Indian Banks Run
4 JANUARY 2018


One of the issues that I have tracked regularly since November 2014, when I first started writing for Equitymaster, is the bad loans of banks. Bad loans or gross non-performing assets of banks, are essentially loans in which the repayment from a borrower has been due for 90 days or more.

And the situation keeps getting worse every time I write about it. The Reserve Bank of India (RBI) released the Financial Stability Report in late December. This report has the bad loans of banks as on September 30, 2017.

The bad loans of banks jumped to 10.2 per cent as on September 30, 2017, up by 60 basis points from 9.6 per cent as on March 31, 2017. One basis point is one hundredth of a percentage.

This basically means that for every Rs 100 that banks have lent, more than Rs 10 has been defaulted on by borrowers. The situation is worse in case of public sector banks. For every Rs 100 lent by these banks, Rs 13.5 has been defaulted on by borrowers. For private sector banks, the bad loans stood at 3.8 per cent.

The good part of this is that the banks (and primarily public sector banks) are recognising their bad loans as bad loans. This wasn't happening when I first started writing about the issue sometime in 2013. But the trouble is that the bad loans figure needs to start stabilising at some level, which it hasn't, up until now.

In fact, in every Financial Stability Report, the RBI makes a projection of where it expects the bad loans to be in the time to come. And in every report over the past few years, this figure has been going up. As the latest Financial Stability Report points out: "Under the baseline scenario, the GNPA ratio [gross non-performing assets ratio] of all scheduled commercial banks may increase from 10.2 per cent in September 2017 to 10.8 per cent by March 2018 and further to 11.1 per cent by September 2018."

In the Financial Stability Report published in June 2017, the RBI had said: "Under the baseline scenario, the average GNPA ratio of all scheduled commercial banks may increase from 9.6 per cent in March 2017 to 10.2 per cent by March 2018."

In June 2017, the RBI expected the bad loans figure in March 2018 to be at 10.2 per cent. Now it expects it to be at 10.8 per cent. This is an increase of 60 basis points. This revision of forecasts has been happening for a while now. What it tells us very clearly is that the RBI is also not sure of how deep the bad loans problem of Indian banks runs. Indeed, that is very scary.

Over and above this as I have repeatedly pointed out in the past, the bad loans have primarily accumulated on account of lending to industry (also read as crony capitalists). Take a look at Figure 1.

Figure 1:

As is clear from Figure 1, the maximum bad loans have come from lending to industry. The bad loans ratio when it comes to lending to industry now stands at 19.3 per cent. This basically means that nearly one fifth of the loans given to industry are now not being repaid. Further, the 19.3 per cent figure is for banks as a whole. The bad loans figure for public sector banks and their lending to industry would be even higher than this.

In comparison, the bad loans rate when it comes to retail lending (home loans, auto loans, consumer loans, loans against FDs, credit card outstanding etc.) is at just 2.1 per cent. In fact, the bad loans rate for home loans stood even lower at 1.55 per cent.

This as I have explained before is primarily on account of the fact that banks managers are in a position to decide who to give a retail loan and who not to, but that does not always apply when it comes to lending to industry. And that is a problem that will remain as long as banks continue to be owned by the government.

To conclude, all one can say is that we haven't seen the last of this problem and there will be more to come in the days to come. This becomes even more obvious from the fact that RBI has been putting more and more public sector banks under prompt corrective action framework.

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