Story Of The Week

The NPA Stinger: A Revisit

“Banks do not create money for the public good. They are businesses owned by private shareholders. Their purpose is to make a profit.”

Hem hem… doubt the experts when they talk about the Indian banking industry. Over the past few years, the shareholders of the banks (barring a few) have not seen much profits. Truth being said, it has been a bunch of shocks running from everywhere to everywhere.

Talking about the global concerns, banking Industry is seeing an adverse impact from Bitcoins and Cryptocurrency. In the Indian scenario, this threat has been largely coupled by the NPA problem.

Non Performing Assets or NPAs are credit facilities for which the interest/installment of principal remains due for a specific period of time. The term is usually used by financial institutions for credits that are defaulted upon. The loans that are in danger of being defaulted are called NPLs (or Non-Performing Loans).


In this article, we aim to discuss the portion of Indian Banking industry that could handle NPAs well, and another portion of the industry that could — as discussed often– not. We also introduce the steps taken by the authorities to help banks with the NPA problem and conclude with the global perspective of the issue at hand. Let’s plunge right in with the sectors that have been impacted worse…

The Bad Legs

In this FY18, 12 banks had Gross NPA (GNPA) ratio of above 10% and interestingly, all are in the public sector. In the fourth quarter of FY18, the government banks reported a net loss of more than 50,000 crore which is substantially higher compared to net loss of 4,300 crores in the same quarter last year.


Here are some facts regarding the NPA ratios in Public Sector Banks:

  • Punjab National Bank – In the fourth quarter of FY18, PNB reported a net loss of Rs 13,417 crore. Its gross non-performing assets (NPAs) rose to 18.38% of gross advances and Net NPAs were at 11.24%. This massive loss is largely due to the fraud PNB has witnessed this February
  • State Bank of India – SBI posted a net loss of Rs 7,718.17 crore for the March quarter due to higher non-performing assets (NPAs). Gross NPAs of the bank rose to 10.91% while Net NPAs jumped to 5.73%
  • IDBI bank reported a net loss of Rs 5,663 crore with the provisions increased to more than 10,000 crores. The bank also reported its highest ever gross non-performing asset (NPA) ratio at 27.95% and net NPA ratio rose to 16.69%
  • Other than Indian Bank and Vijaya Bank, all other public sector banks reported the net loss this last quarter.

The banks had witnessed these huge losses on account of increased provisions which have doubled over the last quarter. This is because of the circular released by Reserve Bank of India(RBI) this February. This circular eliminated series of schemes like (Strategic Debt Restructuring Scheme) SDR or (Sustainable Structuring of Stressed Assets) S4A and replaced them with Insolvency & Bankruptcy Code(IBC).

Now RBI directed banks to refer defaulting companies to a bankruptcy court if a resolution is not put in place within 180 days of default. Because of this circular, these will get recognized as NPA more quickly and that is the reason banks had to provide provisions for all these loans.

However, RBI has provided two relaxations.
First: Banks are allowed to spread mark-to-market losses on the bond portfolio over four quarters.

Second: The other relaxation allowed lenders to reduce the provisioning amount against cases in the National Company Law Tribunal (NCLT), a forum where cases relating to insolvency of corporates will be heard, to 40 percent from 50 percent earlier. While some lenders used the relaxation, others did not.

First: Banks are allowed to spread mark-to-market losses on the bond portfolio over four quarters.

Second: The other relaxation allowed lenders to reduce the provisioning amount against cases in the National Company Law Tribunal (NCLT), a forum where cases relating to insolvency of corporates will be heard, to 40 percent from 50 percent earlier. While some lenders used the relaxation, others did not.

And The Better Ones (Not So?)…

The common argument that runs with the private sector bank narrates of these banks having “superior skills” and “governance bandwidth” for risk evaluation in long-term projects. Thus, the NPAs in these banks appears much smaller than the public sector banks.

However, according to many other arguments, the data may not be showing the entire picture. Through the past years, the burden of infrastructure financing has fallen upon public sector banks and not the private sector ones and that is why, some experts argue, the public sector banks have more NPAs.

The arguments go on to state that the bulk of infrastructure credit came from the public sector, as India had to go on a path of “inclusive development”. These credits were widely supported by the policymakers over years. Thus, it may be inaccurate to conclude that only public sector banks lack the ability to screen the riskiness of the projects.

Though NPAs have been better managed by the banks that excessively rely on the retail part of lending, the attack on NPAs has lead to a situation of risk aversion, fear of lending, and choking off forms of credit.

With the attack on NPAs, the banks will be unwilling to fund the long-term infrastructure projects. If this situation continues, an important question will have to be answered. If not them, who will fund these projects?The strategy now seems to be getting focused towards the bond market… Well.. Will it work out?

Anyways, even with fewer numbers, NPA problem continues to exist in the private sector banks. For the last quarter of FY 18, the profits of private banks fell to 7,203 crores from Rs.10,988 crore in the same quarter last year. Axis Bank reported a net loss of Rs 2,189 crore. Though HDFC Bank and ICICI reported profits but missed out on estimates.


Moving to the next segment of the article, the government has been trying to help the public sector banks handle their share of problems– the portion of which, of course, is much more than the share of the pie that private sector frets from.

Last year, the government announced 2.11 lakh crore recapitalization package over two years for public sector banks reeling under high percentages of NPAs which is aimed to push credit growth in the country to 15%. But with the increased provisions and NPA ratios, this recapitalization package looks minuscule to boost credit growth in PSBs.
With Indian government already missing fiscal deficit targets as expenditures are growing, whether will govt provide any extra package is to be seen.

Us against the World

The current scenario doesn’t appear so radiant. The non-performing assets accumulated by Indian lenders are higher than banks in most large economies including the US, UK, and Japan. Care Ratings ranks India on 5th position (out of 39) in terms of the world economies handling (or maybe mishandling) bad debts.

The countries that have higher NPA ratios (NPA ratio = Net non-performing assets / Loans given) are a part of the PIIGGS Group. Let’s pause for a second and see how the previous sentence makes sense.

PIGGS comprises a group of eurozone countries that have faced tremendous financial and economic distress for a decade. Several steps have already been taken to resolve the issue and restore their health. So what?

Unlike them, India has been growing at a very fast pace. Thus, the NPA problem continues to be a big threat.


Though many of the private sector banks have had better experiences with the NPA problem, the overall banking industry appears to be in deep sludge. The continuous and sequential discovery of fraudulent transactions has made the situation dire for banks. As for you ( assuming you are a potential investor or a well-wisher), breathe well and search for places where the banks have taken care while giving credits. As for NPAs, we may need to revisit the thing again and again. Till next time….



Categories: Story Of The Week