Why Taxpayers and Depositors Should Worry about Bad Loans?

Tue, 16 Aug Pre-Open

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As per finance ministry data, public sector banks have written off loans totaling Rs 2.5 trillion in the past eleven years since 2006. Loans write-offs jumped sharply in recent years, with the PSBs writing off the highest-ever amount close to Rs 600 crore in the year ended March 2016.

Banks write-off loans when they see limited chances of recovery. While some of the loans written-off are later recovered by the banks, their recovery rate remained low. The asset quality review, which was conducted by the Reserve Bank of India last year forced these banks to disclose their bad loans and to being work on setting up a recovery mechanism for these loans. The majority of these stressed loans are from the Infrastructure, power, and textile sectors. Since some of these sectors have witnessed a slowdown and rising costs having wreaked havoc on their profits, the question is why did the banks act as a mute spectator on witnessing this deteriorating performance of their borrowers and in fact continued to lend them even more money?

By continuing to lend to these borrowers, the banks pushed the proverbial can down the road. The time of reckoning, though has come for these banks and questions are being asked about their lending practices.

Why should this bother you as a taxpayer?

Banks have to take a huge provisioning hit when they loan goes bad. Remember this adversely impacts the bank's profitability. While the government banks survive due to annual capital infusion from the government, the money that is infused is the taxpayer's money!

Why should the taxpayer bear the brunt for the negligent lending standards of the banks? For a long period of time, the state-run banks have been an epitome of inefficiency and have displayed their vulnerability to political pressures. The total gross non-performing assets of Indian banks are uncomfortably high. The banks are also grappling with willful defaulters; these are defaulters who have the capacity to pay, yet they have not paid their dues.

How do write-offs impact depositors? Banks that have a high level of non-performing asset tend to have low deposit rates. Similarly, they keep lending rates high in order to recover the losses on these assets.

The RBI, having forced the banks hand to have a clear road-map to clean up their balance sheets, has even set up a deadline for banks to complete this cleanup by March 2017. The pain, however, is far from over. There is a rising trend in Special Mention Accounts 2 category (SMA-2). These are accounts wherein the repayment is overdue for 60 days. This data means that there are more loans which could turn bad in the near future.

While bad loans are part and parcel of any lending business, there is an increasing need to monitor the lending practices of the public sector banks. The government has to firmly convey the important message regarding these capital infusions, aka bailouts cannot continue forever. Banks on their part need to take credit appraisal of large industrial loans very seriously. Else, we will again be facing the same issue in few years.

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