Inherited banking system with NPAs, says FM Arun Jaitley as bad loans hit record 9.5 lakh crore

Finance Minister Arun Jaitley has said that the Narendra Modi government inherited a banking system whose monies were lying in non-performing assets (Image: Reuters)

As India’s bad loans situation gets worse day by day, Finance Minister Arun Jaitley has said that the Narendra Modi government inherited a banking system whose monies were lying in non-performing assets, and reforming it is the top agenda of the government. India’s bad loans have hit a record high of 9.5 lakh crore at the end of June 2017, Reuters said in a report. banks’ total stressed loans – including non-performing and restructured or rolled over loans – rose 4.5 percent in the six months to end-June.

Saying that India is in a catch-22 situation, the Finance Minister said it is working on a plan to rebuild the capacity of the banking sector so that it could support growth, PTI reported. “Today, with global growth turning around, we are working to put up an actual plan in play to deal with the banking situation, which is top of our agenda. We need to rebuild the capacity (of the banking sector),” Arun Jaitley said at Harvard University in Boston during his week-long visit to the US to attend the annual meetings of the International Monetary Fund and the World Bank.

India’s bad loans have been getting worse since 2011. According to the latest available World Bank nonperforming loans data, India’s loan defaults were at staggering 9.2% of the total gross loans in 2016, second-highest in Asia after Pakistan (11.3%). A loan becomes non-performing or bad when a borrower stops repaying either the principal amount or the interest.

According to the data on bank nonperforming loans by different countries maintained by the World Bank, India’s picture is not just bad but it is also worrying. India’s bad loans have surged drastically in the past six years. In 2011, India had just 2.67% of bad loans, which surged to 5.88% in 2015. The sharpest rise came in 2016 when the bad loans shot up to 9.18%.

To deal with rising bad debts, the government introduced Insolvency and Bankruptcy (IBC) Code in May 2016, which consolidates the existing framework by creating a single law for insolvency and bankruptcy. It is expected to ensure time-bound settlement. The effects of the law have already started emerging as corporate giants like Jaypee Infratech, Essar Steel, Reliance Communication Ltd and start-up Stayzilla are already facing the heat of the IBC law. However, the government would need more strategic measures to deal with NPAs.

In India, power, steel, road infrastructure and textiles sectors are the biggest loan defaulters of state-owned banks. According to CARE Ratings, the gross non-performing assets of state-owned banks surged 56.4% to Rs 614,872 crore in 2016. In this respect, India fares worse than not only China but other countries as well, including the US and the UK. However, Pakistan’s bad loan percentage is bigger than that of India. According to IMF financial soundness indicators for July-September quarter for the last year 2016, the percentage of bad loans for Pakistan stood at 11.3% followed by India at 8.6%. Rest of the countries — China, Japan, USA and UK reported their bad loans below 2%.

Source: IMF financial soundness indicators

Most economists feel that there are two main reasons behind India’s increasing bad loans: first, slower revenue growth; second, higher interest rates. According to the World Bank, India, on an average, takes over four years to declare a company insolvent, which increases the risk of not recovering that amount, while China and the United States take less than half of that time. India only recovers 25% for every dollar, while China recovers 36%.