Will Banks come out of NPA Crisis in 2016?

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The banking sector saw a rising tide of bad loans in 2015. It's no news. The topic has been making rounds all the year. Many factors contributed to this depressed state of both - private and public sector banks (PSBs). Some to be named are poor credit appraisal, over leveraging and financing new loans to pay off the old ones. As a result bad loans have been accumulating; particularly in PSBs.

So, Will this New Year be any different?

Let's take the most recent reading. In its recently released Financial Stability Report (FSR) by RBI, the gross NPAs, led by state-run banks, rose to 5.1% as of September quarter 2015. This was higher than 4.6%, reported in March 2015. Furthermore, net NPAs increased to 2.8% during the September quarter, pushing the total stressed assets to 11.1%.

More Defaulters to Feed the NPA Giant...

As an article in The Economic Times states, NPAs may rise further in the initial months of 2016. This is as the RBI has reportedly identified top 150 defaulters. It has asked banks to make additional provisions for these loans.

To note, the primary reason for an alarming rise in NPAs was excessive lending by banks to these companies. And these companies were further proved out as not being in a position to repay those loans. With the facts at hand, they still aren't.

The Carried Over Effects...

With the above dilemma, banks are said to enter 2016 with US$ 60 billion red ink on their books. With rising NPAs, profitability of banks may take a further hit. Moreover, the FSR reports also suggest that default by three top corporate entities could wash out around 13% of the bank capital.

Are Any Hopes Out There?

If banks need a turnaround in 2016, a serious clean-up job is a must. And a turnaround is necessary as banking sector cannot afford to remain unresponsive at this juncture where reforms are carried out to take the economy at a new stage.

For that to happen, banks need to strengthen their internal control and risk management system. There should be a system for timely detection of NPAs. More importantly, an in-depth assessment of borrowers shall be carried out by bankers rather than simply focusing on the interest income.

The government has already given banks more tools to speed up their recovery from assets in the form of strategic debt restructuring. And RBI governor, Raghuram Rajan, has set a deadline for state-run banks to clean up their bloated books by FY17.

We would like to see more development and steps taken by the banks in this direction. Time will tell whether 2016 will really be a New Year for the banking sector.

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