Thanks to UPA, next govt may have to deal with a crippling banking crisis

If the elections throw up a hung Parliament, economic uncertainty will only aggravate. This will increase the pain in the banking system.

FP Editors January 15, 2014 14:43:22 IST
Thanks to UPA, next govt may have to deal with a crippling banking crisis

The United Progressive Alliance is desperately trying to revive the economy. It is bringing about 'big-bang' reforms, shunting out ministers who did not perform and speeding up project approvals. But the economy is yet to show any signs of revival. And bearing the brunt of this is the banking sector.

According to a report in The Economic Times today, around Rs 33,000 crore of restructured assets are likely to turn bad this year.

Loan restructuring is a process by which banks change the tenure and interest rates of loans given to corporates. This is done when the corporates default on payment of both interest and principal. The process helps the banks bring down the NPA ratio on their books.

Thanks to UPA next govt may have to deal with a crippling banking crisis

Representational Image. Reuters

As of 30 September, the CDR cell has received a total of 580 references amounting to Rs 3.6 lakh crore debt, data on the CDR website showed. Compared with this, a year ago cases referred stood at 466 with a debt of Rs Rs 2.46 lakh crore. In a year's time, there has been an increase of 114 cases with debt of about Rs 1 lakh crore.

Banks restructured the corporate debt on expectation that the an economic recovery will help the companies improve their earnings. But global and local uncertainties have only aggravated over the last few months. The economic revival has been weak, further worsening the financials of these companies.

"We fear there could be some stress going forward, as the proposed cash flows may not come by," a senior banker has been quoted as saying in the ET report today.

His fears are not misplaced. The IIP print for November, which showed a decline of 2.1 percent, is a proof. What is worse is that the fall in factory output was due to a slump in demand for consumer goods during the festival season, when usually the demand is on a high.

The slowdown is evident in the power consumption too. According to a report in The Economic Times yesterday, in October-December the country's power deficit hit a record low of 4 percent mainly due to lower consumption by industrial units, which are grappling with a demand slowdown.

With elections scheduled by April-May, companies are unlikely to make any investment until a clear picture emerges at the Centre. If the elections throw up a hung Parliament, economic uncertainty will only aggravate. This will increase the pain in the banking system.

Rating agency Crisil had in September estimated that banks' restructured book will balloon to Rs 4 lakh crore by the end of this financial year.

As per the data until 30 September, banks have successfully exited only about 15 percent of the total CDR cases approved by the CDR cell. This means the success rate in debt restructuring is small. If the economic and political uncertainty indeed drags on, slippages (restructured loans turning bad) are going to be a norm in the banking sector.

Banking sector NPA is a time bomb ticking away. It will not be easy for the next government to diffuse it.

Updated Date:

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