The ticking NPA clock: How many crores in bad loans are weighing on Indian banks' balance sheets?

Mounting bad loans on the books of Indian banks, especially state-run lenders, is a major concern of the Reserve Bank of India (RBI) and the policymakers at government. At last count (as on 31 December 2015), the total gross non-performing assets (GNPAs) of 26 public sector banks have totaled Rs 4,04,667 crore (the bad loans clock on the homepage should give you an indication).

But, that's not all.



Banks also have significant portion of restructured loans on their balance sheets (somewhat equal to the NPA amount), which also faces the risk of slipping to bad loan category if the economy doesn’t pick up as expected. The total stressed assets in the Indian banking industry would be around Rs 8 lakh crore or 11.25 per cent of the total loans given by Indian banks.

There are several reasons for the current build up of NPAs on the book of banks. These include years of reckless lending and vulnerability of state-run banks, which control 70 percent of the banking sector, to the infamous corporate-political nexus. Indian banks have been covering up a large portion of their NPAs by pushing them to restructured loan category.

But this practice ended when the RBI governor, Raghuram Rajan set March, 2017 deadline for banks to clean up their books and withdrew special treatment for restructured loans. From Rs 53,917 crore, Indian banks’ GNPAs in September 2008 (just before the 2008 global financial crisis broke out following the collapse of Lehman Brothers), the bad loans have now grown to Rs 4,00,000 crore in December, 2015.

The dirt has begun to come out in large chunks.

But, how big is the NPA problem at this stage and what is the cost to economy on account of this? Under current norms, banks need to set aside money against bad loans in the form of provisions. Banks take a hit as they need to provide for this chunk, in turn, spiking up their capital requirements. In the case of state-run banks, the burden to feed these banks is on the taxpayer, since government is the owner of these banks.

The government has promised to infuse the needed capital in state-run banks (it has promised Rs 25,000 crore in this year’s budget. But, the burden can grow multifold if the economic activities do not pick up on the ground.

The NPA calculator
In a way, the NPAs are idle or frozen money on the balance sheets of banks, which turns riskier every passing day as the financial health of borrowers deteriorates. Firstpost attempts to count the interest burden that gets accrued on Indian banks bad loan pile every passing second.

To be sure, it is difficult to do an accurate estimate of rising interest cost since the Rs 4 lakh crore NPA amount is piled up on banks' balance sheet over several years. Also, corporations have been given loans by banks at various rates of interest (in the range of 7 per cent to 14 per cent) including those loans given during the BPLR regime. The Firstpost NPA clock shows the interest accrued on the total chunk of GNPAs counted till December 31. As mentioned earlier, this calculation is only a broad indication of the escalating interest costs. For the purpose of calculation, let's assume that all loans are given at an average 11 per cent.

The idea is to give a sense of the escalating cost on NPA accounts on banks’ balance sheets to the readers. The clock begins to tick today and will be updated on a quarterly basis using the updated GNPA numbers.