Bank NPAs: Despite continuing write-offs, decline in NPAs after a long gap is good news for industry

For the first time in at least five years, the Indian banking sector is witnessing a decline in the gross non-performing account (NPA) levels. To quote exact figures, the gross NPAs of all public sector banks or PSBs declined by Rs 89,189 crore from a peak of Rs 8.95 lakh crore in March 2018 to over Rs 8.06 lakh crore in March this year, according to official data. Why is this figure important? For several years, the Indian banking system was deeply infected with the financially unhealthy practice of constant evergreening of bad loans or the jugaad of keeping a bad loan as standard by paying a minimum amount at the end of the 90 day-cycle or by securing a fresh loan to pay up the old loan. This resulted in a substantial chunk of bad loans hidden in the books of PSBs and turned their GNPA statements a subject of a joke to analysts. This scenario changed when the Reserve Bank of India (RBI) woke up from its deep slumber in 2014-15 and initiated the bank loan clean-up process through early identification of stressed assets. The central bank later launched an all-out asset quality review (AQR) and other schemes to dig out the dirt from under the carpets of government-owned banks. This resulted in a sharp spike in the NPAs of these banks—from around Rs 2-3 lakh crore about six years back to close to Rs 9 lakh crore in March 2018. [caption id=“attachment_7023271” align=“alignleft” width=“380”]  Representational image. Reuters.[/caption] The decline in NPA-levels after a long period of constant increase would mean the following things: First, the NPA clean-up process and the resultant accumulation of stressed assets over the years may be finally over in the banking sector. Most of the pain may be over for hitherto capital-starved NPA-ridden state-run banks. Consequently, the capital burden associated with high provisioning of bad assets will come down from this point onwards—good news for the government who is the majority owner in these banks. Second, cleaning-up of books means these entities now have much more believable balance sheets to lure potential investors. Cutting government stake to minimum has been a long-pending agenda for this government and even for the UPA, but the plan hasn’t quite taken off well because the weak state of PSBs failed to appeal to investors. With respect to NPA accumulation, that problem is addressed more or less post-AQR. Having said that, part of the reason why NPAs must have shown a decline could be technical write-offs of NPAs. Banks move bad loan accounts to this category when recovery doesn’t happen even after a long period. It still doesn’t mean that banks can no longer recover this amount. But chances are relatively less. As this Financial Express report says, in FY18, PSBs wrote-off loans worth Rs 1.28 lakh crore and in FY19, 16 PSBs alone wrote-off Rs1.77 lakh crore. Had this not happened, the aggregate NPA levels would have been even higher. But as a matter of fact, write-offs have been happening every year in sizable amounts and one cannot rule out recovery from these accounts. Even after factoring in this, the decline in NPA levels is encouraging and shows that there is some good news finally for the banking sector. The government should use this chance to market these entities well to private investors. The point here is: despite continuing to write-off loans, a decline in NPAs after a long time is good news to the industry. The PSBs—struggling to stay afloat—may be out of the ICU, finally. There is a long way to full recovery though.