The Bane of NPAs in the Public Sector Banks

In a recent development, a news report revealed that banks write off bad loans worth over Rs 2.09 lakh crore during the year ended March 2023. The Reserve  Bank of India in reply to an RTI revealed the figure.

The loan write-offs by banks in March 2022 was 1.74 lakh crore  which rose to Rs 2.09 lakh in March 2023.

However, the abysmal recoveries of written off loans by the banks has emerged as a worrisome trend for the banking sector.

Understanding NPA
All advances given by banks are termed assets, as they generate income for the bank by way of interest or instalments. However, a loan turns bad if the interest or instalment remains unpaid even after the due date and turns into a Non Performing Asset (NPA).

According to a July 2014 RBI circular, all advances where interest and or instalment of principal remains due for more than 90 days, would be classified as a “Non Performing Asset”.

Impact on the Banking Sector
The earning of income for the banks is through interest they get on the loans given to the borrowers. With this income, the interest to the depositors is being paid by the bank. 

The balance between the interest income and income paid is the profit earned by the bank. This is the reason the interest charged by the bank is always more than the interest given to depositors.

As a matter of fact, the deposits received by the bank are used to give loans. And when the loan is not repaid by the borrower, the bank would also find it difficult to return the deposits to its customers.

According to the data provided in the parliament on the quantum of NPAs, in seven years between 2014-2021, the Gross NPA of PSBs was worth Rs. 5.76 trillion. 

Massive Write Offs in Modi Era
A detailed letter dated June 15 from Dr. Bhagwat Karad, Minister of State for Finance mentioned that the losses suffered by all categories of banks (Public Sector Banks, Private Banks, and Foreign Banks) in the last eight years and nine months of the Modi government sums up to Rs 12,09,606 crore.  

As per an RTI filed by economist Prasenjit Bose in 2022, massive write-offs of NPAs have caused serious financial losses for the PSBs. Between 2015–16 and 2019–20, the PSBs as a group made net losses every year, aggregating Rs 2 trillion in five years. 

And the worrisome trend in the present government’s tenure is that bulk reduction of NPAs has occurred through write-offs and not through recoveries.  

Contrasting NPAs in UPA and NDA Govts.
A comparative analysis of NPA management during the UPA-I and II government with the current NDA rule reveals intriguing differences. Under UPA governance, every Rs 100 of NPA growth saw recoveries of Rs 63.34, while write-offs amounted to just Rs 8.62. In stark contrast, during the NDA rule, the recoveries dwindled to Rs 31.65 for every Rs 100 of NPA accretion, while the write-offs surged to Rs 39.38.

The data in the public domain indicate public sector banks grapple with monumental losses and a staggering volume of NPAs. And methods of handling it via recovery and write offs require strategies to address the financial challenges on multiple fronts.