The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Akhil Verma, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur
The recent sudden surge in disclosed non-performing assets (NPAs) of public sector banks in India has resulted in strong public outrage. Huge NPA is undoubtedly a drag on banks as well as economy of the country. Most banks in the country are heavily debt-ridden and a substantial portion of this credit is unlikely to be recovered in the foreseeable future. Public Sector banks provide around 80% of the credit to industries in India and it is this part of the credit distribution that forms a great chunk of NPA.
There are several reasons for the current build up of NPAs on the book of banks. These include a combination of worsening business conditions, wrong-headed business decisions and banking malpractice and inefficiency. There are two groups of defaulters who have majorly contributed to this; big corporate houses and farmers. Reckless lending to both groups can be attributed to political and economic pressure which the public sector banks face.Infrastructure/ EPC/ Construction/ Engineering are trickiest industries wherein if there is a delay in execution of the project, the project won’t be economically feasible. Banks lent money assuming that the projects will be completed on time and the principal and interest will be serviced back by the company where as the same did not hold true at ground level.
Actual state of NPAs needs to be disclosed for any solution to ponder upon. There are lots of hidden NPAs in the banking system at present as well. These need to be identified and no leniency or favoritism should be shown while taking action against willful defaulters. Banks/Financial Institutions should make proper efforts for assessing the risk levels before lending. It is all about maintaining a balance between growth and risk-bearing advances.