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The enabling conditions for a bad loan to become standard are absent. (Bloomberg)
The enabling conditions for a bad loan to become standard are absent. (Bloomberg)

As stress piles on, Indian lenders are on their way to large write-offs

  • The fact that bad loans got worse in the past three years shows IBC has had limited success in enabling quick resolution
  • Labelling an errant borrower as bad is only the first step by a bank

Indian banks have been facing a tough time getting back their monies from recalcitrant borrowers for long now. But their biggest hurdle in getting back dues is time. As time stretched, bad loans have only got worse and banks have had to keep increasing their provisions at the cost of profits.

Labelling an errant borrower as bad is only the first step by a bank. The real challenge begins when the borrower is either unable or unwilling to clear dues for a long period.

Graphic by Santosh Sharma/Mint
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Graphic by Santosh Sharma/Mint


Cast your eyes on the adjoining chart that shows the various hues of bad loans. According to the Reserve Bank of India (RBI), a loan is non-performing if dues are unpaid for 90 days or more. A non-performing loan may bounce back to being standard if the borrower restarts regular payments, or it could slip further to being sub-standard and doubtful to finally a loss asset. Loss assets are invariably written off.

Doubtful assets are those that have been bad for more than a year. These assets formed 6.4% of bank loans as of March 2019, a sharp rise from 4.4% in FY16. Recall that the Insolvency and Bankruptcy Code (IBC) came into force in June 2016 and was expected to boost banks’ efforts to recover dues. Even after three years after the code’s implementation, recoveries have not improved significantly.

The objective of the IBC was to provide resolution swiftly so that the value of the asset is not eroded. The fact that bad loans have only got worse in the past three years shows that the code has had limited success in enabling quick resolution.

To be sure, the stock of bad loans has come down. But as this column has pointed out earlier, banks have been bringing down their bad loan pile largely through write-offs. The surge in doubtful assets portends a rise in write-offs, going ahead.

The enabling conditions for a bad loan to become standard are absent. The economy is in protracted slowdown and several stressed sectors are yet to emerge out of their problems. Even as fresh stress has been piling onto bank balance sheets, past pain is only getting intense and this does not augur well for future recoveries.

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