What are bad loans?
Bad loans are those for which the interest or principal is not paid for 90 days or as per the original agreement between lender and borrower. They are also known as Non-Performing Assets or NPAs.
RBI sets 2017 as deadline for cleaning NPAs
- In a bid to cleanse the banking system, RBI Governor Raghuram Rajan has set a deadline of 2017 for cleaning bad loans by banks.
- The cleaning up and restructuring of other possible NPAs is necessary to accelerate economic growth.
- Due to a large number of bad loans, banks are averse to lending which had affected capital availability and the start of new projects.
Government owned ARCs to check bad loans
- The government is planning to set up Asset Reconstruction Companies (ARCs), in partnership with the Reserve Bank of India to address the problem of bad loans.
- NPAs in banks have increased to 5.1% in Sept'15 from 4.6% in Mar'15, putting excessive pressure on the economy as a whole.
- However, RBI is not comfortable with the current distribution of stakes in the proposed ARCs.
What are ARCs?
- Asset Reconstruction Company(ARC) is an instrument to recover bad loans.
- They work by acquiring bad loans from banks at a discount and then aim to recover them by sale of assets, turnaround through professional management, etc.
- With a net worth of ₹4000 crore, there are about 15 ARCs in India. However, they have been able to recover only one-third of assets acquired by them.
Reason for less attraction towards ARCs
The ARCs are facing credibility issues as public banks fear selling their assets to private ARCs as the discount rates can later be questioned by government auditors, vigilance departments or even intelligence agencies.
RBI does not want government shareholding in ARCs
- The government wants to have a stake in the ARCs to give them greater credibility.
- However, according to RBI governor Raghuram Rajan, the government's shareholding in ARCs poses a "moral hazard".
- The bad loans have been acquired by banks due to some reckless lending in which due diligence was not observed.
- Hence, the tax payers money should not be spent on correcting this anomaly.
PNB profit precipitates
- Punjab National Bank (PNB) posted a decline of 93% in profits for the 3rd Quarter (Oct-Dec'15) to ₹51 crores.
- Notably, the bank had posted a profit of ₹775 crores in the same period previous year.
- The decline in profit is attibuted to greater provisioning of bad loans which increased to 8.47% in Q3 (Oct-Dec'15) as against 5.97% in the same quarter previous year.
SBI posts biggest decline in profits in 5 years
- The country's biggest lender, State Bank of India(SBI), posted its biggest fall in profit in 5 years owing to cleaning up of bad loans.
- The bank reported a decline of 62% in profits to ₹1,115 crores in Oct-Dec'15 vis-a-vis ₹2,910 crores in same quarter last year.
- SBI had taken up half of the bad loans in Q3 and would take remaining half in Q4.
Bank of Baroda posts highest quarterly loss
- Bank of Baroda(BoB) reported a loss of ₹3,342 crores for the quarter ending Dec'15, the highest quarterly loss in the history of India's banking industry.
- The loss comes due to increased provisioning for bad loans after the Reserve Bank of India performed a review of asset quality held by banks.
- BoB had posted a profit of ₹334 crores in the same quarter previous year.
Bank of Baroda: a profile
Bank of Baroda, headquartered in Vadodara, Gujarat, was founded in 1908. It is the second largest public sector bank in the country after State Bank of India.
Bank hopeful of profits next year
- The gross NPAs of the bank has increased by 64% to 38,934 crores at the end of 3rd Quarter (Oct-Dec'15) from ₹23,710 crores in the previous quarter.
- In terms of percentage, gross NPAs increased to 9.68% in Q3 as against 3.85% in the same quarter previous year.
- However, the bank is hopeful that it will clean up and post a "reasonable profit" next year.
Fitch: Bank NPAs to improve
- International ratings agency Fitch said the non-performing assets ratio of banks is likely to improve marginally to 10.9% by the end of this fiscal.
- According to the agency, the system currently has stressed assets of around ₹9 trillion.
- The ratings agency expects credit growth at 12-13% in 2015-16, moderately higher than the 9.7% growth rate in the previous fiscal.