Raghuram Rajan should moot clean-up loan policy

Even as Reserve Bank of India (RBI) Governor Raghuram Rajan says the claims made by analysts on the size of bad loans in the country's banking system border on scare-mongering, official data does not paint a rosy picture -- and even shatters some popular perceptions.

As per statistics available with the central bank, the net NPAs, or non-performing assets, of all banks, excluding accrued interest, was 2.8 percent of total loans as on September 15 last year. For state-run banks, it was 3.6 percent -- a sign that it is not uniform across the industry.

But the problem gets compounded when one takes into account the gross NPAs, that also include the interest component: 5.1 percent for all banks and 6.2 percent for state-run banks. And by adding one more component, rescheduled loans and the issue becomes even more perplexing.

The quantum of gross bad loans, along with rescheduled ones (usually done when a loanee is unable to pay in time, and banks allow some more time so as to get the money back), jumps significantly to 11.3 percent for all banks and 14 percent for government-run banks.

Then there are the write-offs -- that is, the loanee has been unable to pay and banks are forced to consider them as exposures they'll never get back. Together with gross bad loans and rescheduled assets, this ratio is at 14.1 percent for all banks and 17 percent for state-run ones. For private sector and foreign banks, it is distinctly lower at 6.7 percent and 5.8 percent.

When we compare historical data, the total bad exposures, including rescheduled and written-off assets, has grown to 17 percent as on September 15 last year, from 13.4 percent in March 2013 and 14.1 percent in March 2014 and 16.1 percent in March 2015.

For private banks the respective figures are: 5.4 percent, 6.4 percent and 6.7 percent, while for foreign banks, it is 5.5 percent, 6.3 percent and 6.5 percent. Rajan says not all bad loans are due to malfeasance. Then governance must be the reason for private versus state-run mismatch.

Is this not alarming? Contrary to the general perception, the level of stress is a lot more pronounced in the so-called non-priority areas, when compared to the exposures to the farm sector and the micro enterprises. This apart, large industries are the ones that have the highest NPA ratio.

The central bank data reinforces this fact. The ratio of gross bad exposures, plus rescheduled loans, plus written-off assets for all banks was 7.9 percent for the agriculture sector, 12.3 percent for the micro enterprises and a whopping 23.7 percent for large industries.

For small and medium scale sectors it was 16.8 percent and 31.5 percent, respectively. The picture emerges even clearer seeing the actual quantum of money involved. As per the Reserve Bank's weekly statistical supplement, the total outstanding bank credit of all banks was Rs.67,060 billion as on September 15, 2015 this date has been taken for comparisons.

If the total exposure in terms of gross NPA, rescheduled loans and write-offs was 14.1 percent for all of India's scheduled commercial banks, then the actual quantum works out to around Rs.9.5 lakh crore. The assumption may be that banks that were in denial over the poor quality of their loans are waking up now.

This is getting reflected in the balance sheets for the quarter ended December 31, 2015. In doing so, if their net NPAs exceed 10 percent, there will be several curtailments. Rajan, nevertheless, sees hope. He feels the extent of government help to commercial banks in the form of capital will be adequate Rs.70,000 crore in the present budget. He is also confident that by March 2017, the banks will have clean and fully-provisioned balance sheets.