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Monday, 18 May 2015 05:50
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RBI Governor warns that NPA-hike cycle still has legs


RBI Governor Raghuram Rajan’s warning, that the bad loans cycle has not peaked, should come as a surprise only to those who haven’t been following the sector. Indeed, while the earlier set of loans going bad were those of big companies, even small firms with very large exposures are finding their loans looking dicey. A combination of reckless lending—ambitious revenue targets and poor collateral—and poor government performance in terms of making clearances available on time, for land as well as for fuel supplies from PSU-monopolies, made it obvious that NPAs still had a way to go before they peaked. In the case of sectors like electricity, the poor financial condition of most SEBs is the problem; in areas like steel, the collapse in global prices suggests that a lot more loans will get stressed in the months ahead. As a recent Crisil report points out, as much as 40% of assets restructured between 20011 and 2014 have degenerated to NPAs—this is a dramatically higher number than the 15-20% assumed by most while discussing the stress levels in Indian banks. Crisil estimates that around R80,000 crore of stressed loans will get restructured under the new 5/25 rule of RBI during FY16—while it is not clear how much of this will turn bad, the result of the 5/25 restructuring will be further camouflaging of stress levels in banks. And, based on its estimate of loans going bad from earlier restructuring, the credit rating agency estimates NPAs rising by R60,000 crore in FY16, taking the total to R4 lakh crore, or 4.5% of bank advances. This has various consequences since, in the absence of the government being able to capitalise banks—Crisil estimates they will need R2.6 lakh crore in the next 4 years—PSU banks will grow at a much slower pace than their private counterparts as a result. Crisil says their growth will be around half that of private banks over the next 4 years. This is quite serious and, given its larger implications, the government has to seriously consider privatising several PSU banks.


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