Bad Loans: Truth Behind The Increasing Numbers…


Bad and Doubtful Debts of banks, also called as non-performing assets or NPAs, have been attracting wide attention these days for varied reasons. One of the major reasons that everyone is pointing is recession in economy or maybe we can say economic slowdown. But, is it the only reason behind the rising bad loans??? Is it a matter of few months that such huge amount of bad loans came to the bright light???

The NPAs of public sector banks has risen to Rs.3.61 lakh crores at the end of December, 2015. The major chunks of these defaulters are big corporate houses. What may be the reason behind such a big number??

One reason is the increasing competition in the Banking Industry. The entry of private players in the sector has changed the whole scenario, with huge capital investment, better technology and enthusiastic team of employees. All these factors helped the private banks grow at the highest pace, creating a tremendous pressure on the public sector banks to match the steps with the private sector. The result is, poor credit assessment procedure, lapses in due-diligence leading to declining attention to quality of assets. This is where the first step towards the downfall was taken.

And then comes, the economic slowdown which is the most cited reason in turning the good loans into bad ones. Whenever a corporate is asked, the standard explanation given by them is that it is tough time for the economy and given that, they are not in a position to repay. However, it is not true, if this would be the situation almost every bank would have experienced similar kind of bad loans.

Although everyone is blaming the economic slowdown for the rising bad loans, the real reasons behind the same are diversion of funds or willful defaults leading to such situation. The borrowers are diverting the funds to the purposes other than for which they were borrowed or have siphoned off the funds. On one hand the borrower has defaulted the repayment of loan and at the same time sold the collateral property of the loan. The RBI defines such category of borrowers as “Willful Defaulters”.

Why banks are not declaring such borrowers as “Willful Defaulters”?? The reason is once a borrower is declared willful defaulter, he will be approaching the court and then it would be the responsibility of the bank to prove that they are willful defaulters, which is again a big game to play. The reason being, the public sector banks do not have such a strong team of legal advisers to win the case. This is where the road block comes…

One reason for the rising NPAs could be the “wait and watch approach” that most banks follow, which allows the deteriorating asset class to go from bad to worse in the hope of revival and often offer restructuring option to the corporates. Extending those extra helping hand can go against the financial health of banks.

Now what do you mean by restructuring? Restructuring is changing the face of a bad loan to make it look as a good loan by increasing the tenure of loan or reducing the interest rate. Although the banks take this step in a good faith, the period for which the restructuring can be held good is very short. The situation is going to be worse before it becomes better. Instead of recognizing the loans that have become bad as bad, they are restructured which turn bad in the near future with the default of borrowers.

What all this tells us is that the Indian Banking System will continue to remain in a mess over the next few years, as restructured loans keep turning into bad loans.