BackHow high are Indian banks’ bad loans?
Bad loans ratio might be understated because of a rise in restructured loans
PremiumBad loans of Indian banks are back in sharper focus as fresh skeletons tumble out of state-owned banks’ cupboards. The government has been quick to order forensic audits and make promises of ensuring better risk management practices. The Reserve Bank of India’s annual report, while acknowledging the problem, points out: “Compared over time and across countries, India’s NPAs (non-performing assets) are not high. Historically, the gross NPA ratio was at 12% in March 2001."
There is some truth to the central bank’s statement. As the chart shows, India’s gross non-performing loans (NPL) ratio at close to 4% is far lower than that of some European economies which were caught in a debt crisis. Close to a third of loans have turned bad in Greece and Cyprus. At the same time, India’s performance pales when compared to that of its Asian peers.
Secondly, the 4% bad loans number hides the fact that a large number of loans have been restructured and have dodged the NPA classification. As RBI’s then deputy governor K.C. Chakraborty said in a November 2013 speech, there are “skewed incentives for banks (and) borrowers to resort to restructuring to classify assets, even the unviable ones, in the standard category and report lower NPA levels."
Restructured loans account for another 5.9% of total advances. Thus, total stressed assets in the Indian banking system are close to 10% of loans, a number that is alarmingly similar to that of Spain and Portugal, two other countries affected by the Euro crisis.
To be sure, other countries too might have restructured loans, which don’t show up in this chart, but such a classification appears unlikely.
According to the RBI’s own 2012 working group on restructured loans, “Regulatory forbearance regarding provisioning, asset classification and capital adequacy is crisis-specific in the international scenario, whereas they have become a permanent feature in the Indian context."
A closer focus on restructured loans is necessary to ensure that India’s financial stability is not compromised.
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