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Cracking down on bad debt

Cracking down on bad debt
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First Published: Wed, Jun 09 2010. 10 09 PM IST
Updated: Wed, Jun 09 2010. 10 09 PM IST
One primary concern during every upturn in the business cycle— when credit is usually booming—is that banks will get carried away and make bad loans, what bankers call non-performing assets (NPAs). Since the Indian economy is recovering, it’s important to address this concern. It’s good to see finance minister Pranab Mukherjee doing precisely that. On Tuesday, he asked banks to pay “significant attention” to rising NPAs.
Recently reported annual results show NPAs increasing in absolute terms. Gross NPAs have risen by 25.5% in the past year to Rs76,000 crore. Credit rating agency Crisil warned last month that gross NPAs could increase from 2.3% of loans made in 2008-09 to 3.6% in 2010-11.
These NPAs originate in 2008-09, when banks restructured debt—tweaked loan rates or tenures—for the many firms that found it hard to make good their loans. The restructuring— worth Rs76,500 crore till March 2009, according to Crisil—gave both bank and client a reprieve, though this turned out to be temporary.
That doesn’t mean the restructuring was a bad idea: A similar exercise worked well in the late 1990s. At a time when the global financial system refused to lend, a sudden rise in NPAs would have threatened bank balance sheets.
But now it’s key to ensure NPAs don’t rise further. Cyclical conditions may play their part: Firms are performing better, while NPAs in percentage terms will decrease as banks disburse more loans.
Yet the best cushions—and steadfast ones—are when regulators make sure that banks possess enough capital and they prepare for loans turning sour. It’s comforting that, first, banks’ capital adequacy is above regulatory requirements. As Western banks have learnt the hard way, capital is most useful when in trouble.
Second, the banking regulator, the Reserve Bank of India, wants banks to provide for 70% of their bad assets, irrespective of what kind of NPAs these are. This may dent profits in the short term, but will be a boon over time.
That’s because as interest rates rise, depending on the pace that they do, banks will expand balance sheets. It’s useful here that the regulator who has a finger on the level of credit in the economy also happens to be the one who keeps an eye on banks, lest they get carried away.
What’s the biggest concern for India’s banking sector today? Tell us at views@livemint.com
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First Published: Wed, Jun 09 2010. 10 09 PM IST
More Topics: Ourviews | Pranab Mukherjee | NPAs | Crisil | Views |