NPA Menace: It's Time For All-Out War


NPA Menace:
It's Time For All-Out War

The scourge of loan losses has a tendency to increase, get too big to ignore, too late to manage, and push the system into crisis -- what the former RBI governor Raghuram Rajan once said now seems to coming true. Bad loans have now shot up by 135% from Rs 261,843 crore in the last two years, with total NPAs of public and private banks mounting to Rs 697,409 crore as of December 2016. When Rajan initiated a host of restructuring schemes a few years ago, it was expected that the situation would improve substantially by the fourth quarter of 2016-17, but the latest data paints a grim picture.

With the NPA crisis rearing its head again and even likely to deepen further over the next two quarters as many firms, especially MSMEs are struggling to repay the loans in the aftermath of note ban, there is a widespread demand for strong government intervention. For now, the Centre appears to believe that growth will automatically take care of much of this crisis. In the last Budget also we have not seen any concrete announcement to tackle the crisis. In January, the Finance Ministry had proposed setting up of a bad bank to buy soured loans from lenders, a proposal raised again recently by a top RBI official.

Besides posing as one of the toughest macroeconomic challenges to the government, a huge pile of stressed loans is also standing in the way of reducing interest rates. While the RBI has made a strong case for making loans cheaper, bankers see little room for doing that due to heavy credit costs and low loan growth. Poor loan offtake -- which decelerated from an annual rate of 11% in January 2016 to 5% in January 2017 -- has, in turn, continued to affect industry growth, with MSMEs suffering the worst of it. In such a situation, the Centre must show a pragmatic approach and strong political will to tackle the situation.
In the meantime, while the IMF said that the cost of bailing out India's struggling banks would be manageable, a World Bank official in a recent event suggested a somewhat novel idea on how to tackle our MSME credit crisis. He viewed that India can increase the credit flow to the sector by another $180 billion by raising its share of movable assets financing from 14% to 25%. Currently 14% of the total asset base of MSMEs comprises immovable assets while movable assets amount to nearly 85% and if at least 25% of total movable assets could be targeted for finance, there will be a big difference.

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