Indian Banks Ballooning With Bad Loans

11.01.2017 • Central Banks

Vivek Kaul – Vivek Kaul’s Diary (India) –

The break at writing the Diary turned out to be much longer than I had expected. The main reason for it will become obvious in the days to come.

A lot has happened during this period, including the Modi government’s defence of demonetisation, which has grown by leaps and bounds. Nevertheless, I thought of giving writing on demonetisation a break for the first piece for the Diary in 2017.

One thing that has got side-lined in the entire discussion on demonetisation is the fact that Indian public sector banks continue to remain in a mess. In fact, as we shall see the mess has only grown bigger in the recent past. As the RBI Financial Stability Report for December 2016 points out: “The stress on banking sector, particularly the public sector banks (PSBs) remain significant… PSBs as a group continued to record losses.”

The gross non-performing assets ratio or the bad loans of the PSBs, increased to 11.8 per cent as on September 30, 2016. This is a whopping increase of 220 basis points from 9.6 per cent as of March 31, 2016. One basis point is one hundredth of a percentage.

The overall stressed assets of public sector banks jumped to 15.8 per cent of total loans. It had stood at 14.9 per cent as on March 31, 2016.

The stressed asset figure of 15.8 per cent was obtained by adding bad loans of 11.8 per cent with restructured assets of 4 per cent. This basically means that for every Rs 100 that the PSBs have given out as a loan, Rs 15.8 are in a dodgy territory, on an average.

Out of every Rs 100 of loans made by the banks, borrowers have stopped repaying loans worth Rs 11.8. Over and above that loans worth Rs 4 for every Rs 100 of loans given by the banks have been restructured. A restructured loan essentially implies that the borrower has been given a moratorium during which he does not have to repay the principal amount. In some cases, even the interest need not be paid. In some other cases, the tenure of the loan has been increased.

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