India’s NPA Problem 1 – 2001 to 2012

Published October 4, 2017 by vishalvkale

As the current dispensation reaches near midway in its 4th year at New Delhi, questions – hard questions – are beginning to emerge on its overall performance till date. The heartening thing in this is the surprising development of the main point at centerstage in the current public discourse, which is turning out to be the economic performance so far. Even some of its own party members and allies have come out against its policies or performance. For once, I can only say that it is nice that we are actually having a national dialogue around The Economy, which is very welcome.
There are several parameters of the Economy that we can discuss; here, I concern myself, in this article, around only one : The NPA problem that Indian Banks are facing. I would like to refer interested readers to the annotated article link in the Bibliography section, which is a report carried on the RBI Website wherein all the technicals are mentioned with data. My main driving concern in this article is the business side of the argument, rather than an economic side, which is only a secondary consideration for me as of now.

I had earlier, in my analysis of Gold, asked the question, have we really emerged from the aftershocks of the Subprime Crisis, even now – 10 years later? A cursory glance at the numbers related to NPAs gives us a very interesting insight: NPAs were in negative territory in terms of growth in Gross NPAs in the run-up to the crisis {Look at the yellow line in the chart} – and then moved up after 2007, when the crisis hit home. Since then it hasn’t headed south. Bank credit also expanded at a much faster pace before than after the crisis {the blue line}; since then, till 2012/3, the numbers were subdued in comparison. I ask this question once again – are we fully out of the aftershocks of 2007? Stay connected with my blog as I attempt to answer that through my own self-study

Moving on, in the period from 2003-2007, as seen in the next chart below, net additions to NPAs were in negative territory; but again, after 2007, they went north, way north – hitting all time highs by the year 2012. And it is from this point that my argument diverges; most pink journals, publications focus on the banks. The enclosed RBI publication makes several observations around the Credit Risk Assessment in Indian Banks, which can decidedly be a lot better; but that is beside the point. Examine this data once again – especially the breakup of NPAs between the priority and non-priority sectors. {Priority Sectors – Bibliography point 2 –  are Agriculture, MSMEs, Export Credit, Education, Housing, Social Infrastructure, Renewable Energy, Advances to weaker sections & Loans upto Rs. 50,000 provided the individual borrower’s household annual income does not exceed specified limits}.

It is the non-priority sector which has contributed significantly to the spurt in NPA growth. In fact, the rise in NPAs in the last2 years of the dataset – 2011-13 shows a sharp rise in NPAs in the non-priority sector of the economy; whereas the priority sector was almost flat in this period. Since the last decade, the share of priority sector in gross advances averaged at over 32 per cent, while its share in total NPAs remained much higher, averaging at around 45 per cent – Chart below. A deeper look at these numbers, in the next article, gives more clarity, with mid-corporate segment accounting for the largest growth in loans in one bank at least.
One side of the debate defends the Government saying this is a longer-term problem; the data bears this out faithfully, to be honest. However, we cannot pass judgement on that alone, as that would be cherry picking facts to suit a hypothesis; we need to look deeper, and at many other factors before we can arrive at that conclusion. For the other indicators do not bear out this hypothesis, as I looked at in one previous analysis. And yet, it is undeniable that this is a longer-term issue, with deep reasons underneath. We need to ask – why should these loans go bad? And the divergence in the MSME and other areas in terms of NPAs needs a deeper look as well!
Now, if a loan goes bad, and the borrower is unable to repay – provided there is no malafide intent – it clearly means that cash flows were not to the tune expected. Business is conducted only for the purpose of cash flows & performance.  This can arise from two or three reasons, {from the business perspective} namely :
1.     Either capacity has been generated but cash flow {sales} do not total cover costs, or
2.   Expenses overshot the plan
3.   Deep – seated structural issues
It is being said that the banks’ risk assessment can be improved; I don’t argue with that – but I humbly submit, in light of the simplified analysis in the above paragraph, that there is another side to it. And that is simply, firstly that these were business decisions that went bad, meaning that these decisions were taken on unsound business principles, or had no longer-term deeper thought in them, or that they were hit by unforeseen problems. Note – unforeseen, not unforeseeable. And that is the most significant aspect we should look at – the decision makers, and the borrowers. Lastly, it also could indicate structural issues; cyclicity of the business cycle is no excuse. And that is what I lay out in greater detail in the next part of this analysis day after tomorrow
In the article above, I look at, firstly, 10 years longer-term NPA Performance, its bifurcation along priority / non-priority sectors, divergence in the trendlines between these two; and the business case for loans going bad. Reason to go deeper is to avoid cherry picking data just to prove a hypotheses, and get to the gist of the real problem. And the reason to study the NPAs is simply that these provide case studies of where we went wrong as an economy, as a leadership, as a people. These are national resources – and we can learn from our mistakes. Stay connected as I progress on this journey basis authentic data; let us learn together…

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