Mumbai: International rating agency Moody’s Investor Services on Tuesday said that non-performing loans (NPL) resolution will be relatively a long-drawn process in spite of the government’s efforts to provide the central bank with greater autonomy in dealing with bad loans and lowering the threshold required among lenders at the joint lender’s forum (JLF). The Indian banking sector is sitting on a pile of stressed assets worth $7 trillion.
“These measures improve the efficacy of NPL resolution mechanisms are credit positive. However, they do not address the lack of capital at the state-owned banks, that has prevented them from writing down NPLs to realistic levels,” Moody’s said in its report.
According to the rating agency, the new measures are on the same lines like 5:25 refinance scheme, strategic debt restructuring (SDR) and scheme for sustainable structuring of stressed assets (S4A), which failed to quicken the pace of the resolution.
Two structural-related factors have not been taken into account by previous measures which aimed to resolve the bad loans issue.
First, operating environment in key stressed sectors has remained challenging. For example, in the power sector, plant load factor is running at multi-decade lows leading to projects being run at much lower capacity. Also, the actual cost of project completion has been much higher than originally planned.
Second, market value of stressed assets is lower than what is reflected in the bank’s balance sheet, which means that banks have to take a large haircut. However, banks’ weak capital levels do not permit to take such a cut.
The NPA problem, to a large extent, is confined to 50 large loan defaulters. “…State owned banks will use most of their operating profits over the next two years to gradually increase loan loss coverage from the current low levels,” the rating agency said.