The gross bad loans of Indian banks as of March 2015, rose to Rs 3.1 trillion or 4.6% of the total loans, as per the data published by the central bank. According to RBI's annual report released in June 2014, six sectors account for the majority of bad debt in Indian banks: infrastructure, metals, textiles, chemicals, engineering and mining. The six account for only 30% of the total credit, but 36% of the total bad debts in bank books. Bankers attribute this to the slower-than-expected recovery in the economy and cheap import of commodities and steel from countries such as China and Russia. To add to this the banks are facing the prospect of at least Rs 1.5 lakh crore of their loans to around two dozen power projects turning non-performing on account of a new rule that mandates them to provide for bad debts if the project cost exceeds 10% of the original estimate, due to delays.
RBI's steps to control bad loans
The Reserve Bank of India (RBI) allowed banks to seize control of a company if a debt recast fails, replace the management, and sell their stake in the defaulting company as soon as possible to recover dues. This is one of the central bank's most aggressive steps to rein in willful defaulters and curb rising bad loans.
Precautionary measures taken by banks
The bank executives are facing pressure from the government to give boost to the economic recovery. Plus the RBI wants them to follow proper credit appraisal procedures before granting a loan. This has left little choice to the banks but to take harsh steps to recover the bad loans. The banks have started taking aggressive steps to recover the bad loans.
Will bad loans now stop piling up?
It is encouraging that the banks and RBI are together taking precautionary measures to stop the piling up of bad loans. However, with sectors like telecom, infrastructure and power far from recovery, banks will continue to feel the stress on asset quality. NPAs have so far not been a systemic risk for India's banking sector. However investors need to be very cautious about selecting entities with a track record of good credit history.