Bad Debt Crisis in PSU Banks

Bad Debt Crisis in PSU Banks

BAD DEBT CRISIS IN PSU BANKS

 

The NPA’s in PSU banks has been spiralling since 2009. With almost 4.5 lakh crores bad debts at stake PSU banks are facing a crisis like never before. As per RBI data the five sub-sectors; infrastructure (which includes power generation, telecommunications, roads, ports, airports, railways [other than Indian Railways] and other infrastructure), iron and steel, textiles, mining (including coal) and aviation services contribute significantly to the level of stressed advances.

 

Reasons for increase in bad loans

  • Slowdown in recovery in the global economy, uncertainty in the global markets.
  • Sluggishness in the domestic growth during the recent past.
  • External factors including the ban in mining projects, delay in environmental related permits affecting power, iron & steel sector, delay in collection of receivables and aggressive lending by banks during good times”

 

Why bad loans is a bad sign

  • The high levels of NPAs indicates that India’s economy is not in great shape, Of 26 public-sector banks (nationalised Banks and the SBI Group), 19 reported Gross NPAs of 5% or more in the latest quarter (refer table below).
  • Second to grow, banks need to raise fresh capital. High levels of NPAs mean weak fundamentals and poor valuation in the stock market, hurting their ability to raise funds for growth. This, again, means insufficient capital to make additional loans

In comparison, private-sector banks seem to have done a much better job of managing risks. Private-sector lenders operate in the same space under the same economic factors as the public sector banks. Emulating their risk-management practices would appear to be top priority for government banks.

 

Way forward:

  • Taking various steps for quicker recognition and resolution of stressed assets.
  • Banks should carry out lending on the basis of objective and due diligence without being unduly conservative, in a completely transparent manner without fear or favour.
  • Taking initiatives like, constituting a Board level Committee for monitoring of recovery, appointment of Nodal officers for recovery at the Head / Zonal Office / for each DRT, conducting special drives for recovery of loss assets, putting in place guidelines for early warning system, designating ARCs as Authorised Officers.
  • Tightened norms to Asset Reconstruction Companies, increasing the minimum investment in security receipts to 15% from 5%.
  • Early passing of Bankruptcy law.
  • Name and shame policy of will full defaulters.
  • Ruling of courts/Debt recovery tribunal should be implemented very quickly.

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