Banks are in the news again. This time it’s the crisis hit Punjab & Maharashtra State Cooperative Bank hit by uncontrollable NPAs. As per reports, it is said the Bank under reported its NPA exposure and has been barred by the RBI from giving new loans. Time will tell how this crisis shapes up in the coming future, keeping in mind the fact that state elections are knocking the door. We are already seeing various political leaders issuing statements on the crisis, so be sure, the fiasco will be milked to death by political parties of all colors.
Time and again, our banking institutions have been rocked by NPA scandals with balance sheets falling down like a pack of cards, taking down investors’ confidence along with them. Be it the Kingfisher airlines default where SBI took a major hit or the Nirav Modi fiasco where PNB was found napping amidst a looming NPA crisis. This time however it’s a state cooperative bank which ideally has a less exposure to corporate lending. One thing is clear, no bank, however big or small is insulated from the ghost of NPA.
What exactly is an NPA??
NPA in the most simplistic way means a bad loan. A loan which the bank is unable to recover from the borrower. Remember, the bank plays with our “public” money all the time. Not that it’s a bad thing to do. After all, we deposit our earnings in the banks in return for an interest. The bank in turn invests/lends that money to corporate/individuals in lieu of a guarantee or collateral, and earns interest on its loan. That is how life comes full circle. As long as the value of collateral is higher than the loan amount, the bank is safe. For even if the borrower defaulted the bank could sell the collateral and recover the debt. Things go bad when the value of collateral is not able to cover the value of outstanding loan amount, as part of the loan is non-recoverable. That is called NPA.
Most of us might have taken a loan to finance our car or home. How come a bank that expects us to never miss an EMI loses Crores of rupees in bad loans? It casts a doubt on the judgment of our bankers, in whose custody we keep our hard earned money. The reasons are many. One the loan to corporate, industries is given considering future cash inflows. And those expected inflows may not happen due unforeseeable circumstances, like a changed market situation or change in Govt policies, making the project unviable. The second reason is collusion of bank officials with the lenders, in which loans are given on unsecure or insufficient collaterals or inflated/spurious financials. This collusion was seen both in case of Kingfisher & Nirav Modi NPA scandals.
As per this report by Livemint, as of June 19, seventeen banks had bad loan ratio above 10 percent with three public sector banks nearing the 20% mark. As of now Indian banks face a mountain of an almost 9 Lakh Crores worth of NPAs.
The above report, though slightly old does not paint a rosy picture too. Rising NPA percentage and declining returns simply mean the banks are losing the capacity lend credit, thus causing a dampening effect on economic growth.
The IBC Code, the 2016 insolvency and Bankruptcy Code has given a way out for the ailing banks. Lenders should take the decision, and not delay in initiating proceedings within the IBC framework so as to maximize recovery from assets sale or reconstruction.
Internal checks, the banks must exercise caution, while financing and not take too much risk on their back. Keeping the risk exposure within the norms will prevent a bubble burst.
Third, the Govt must increase its own spending, till the time the banking sector recovers to comfortable levels, to restart the credit growth which spurs investment and expansion of the economy. This may lead to an increase in fiscal deficit but considering the Govt has largely kept it under control, maybe it is time to loosen up the strings for the time being.
Indian economy has traditionally been a savings driven. Where we put in our savings in banks and banks invest them in the economy. Instead, we, people could directly invest in the economy. By way of shares, SIPs, Bonds, and so many other investment options present in the market today. In effect, we have to move towards an investment driven economy. So that the decision as to where to invest the money lies with the individual rather than the bank. After all one wrong decision will affect one individual rather than all those who banked on the banker. In case of the PMC Bank who robbed it, only time will tell.