The Reserve Bank of India has recently submitted to the Central government its Report on Trend and Progress of Banking in India for the year ended June 30, 2019.
The report generally analyses the trend and progress of the banking sector under different captions like perspectives, global banking developments, policy environment, operations and performance of commercial banks, developments in cooperative banking and non banking financial institutions.
Under operations and performance of commercial banks, the present report outlines: “The slowdown in global and domestic growth impulses in the recent past impinged on credit demand. The asset quality, capital adequacy and profitability of scheduled commercial banks improved after a long period of stress, although challenges emerged from other areas like non-banking financial companies and co-operative banks...”
It added: “Going forward, issues such as resolution of stressed assets, weak corporate governance, and frauds need to be addressed to reaffirm a robust financial sector that minimises systemic risks’.
For the banking sector, capital adequacy, leverage ratio, liquidity standards, non performing assets, recoveries and frauds have been used as performance indicators.
As part of the analysis, it has been brought out that the GNPA ratio of all scheduled commercial banks (SCBs) declined in 2018-19 after rising for seven consecutive years, as recognition of bad loans neared completion. This is being discussed in the media as if the NPA problem of banks has been finally tackled for the better.
Ratios down
All SCBs had a Gross NPA of ₹10,38,684 crore as on December 31, 2018. Addition during 2018-19 was ₹3,14,449 crore. Reduction (by recovery or improvement) was ₹1,79,711 crore. A sum of ₹2,36,948 crore was written off and the balance is ₹9,36,474 crore as on December 31, 2019.
Gross NPAs as a share of gross advances was 11.2 per cent as on December 31, 2018 and 9.1 per cent as on December 31, 2019.
It is clear that the banks have written off ₹2,36,948 crore, whereas the actual reduction in NPAs by way of recovery or improvement was only ₹1,79,711 crore.
Hence, the major contributor for the reduction in gross NPAs is the amount that was written off. This is naturally to the debit of profit and loss accounts of the current year or previous years. How can this be considered as effective management of NPAs or improvement in the quality of assets?
Amount debited
When the reduction in NPA is on account of the amount written off, it means that the full NPA amount is debited to the profit and loss account. But when the reduction is on account of recovery, the full amount need not be recovered, and only the installment due or the interest recovered will remove its tag from NPA label. Here, it is not a full recovery, but mere conversion to a performing asset with partial recovery.
During 2017-18, the amount written off was ₹1,627 billion whereas for 2018-19, it is ₹2,369 billion. Hence, there is an increase of 145 per cent in the amount written off by banks.
Provisions made
The net NPA has come down to 3.7 per cent from 6 per cent during 2018-19. Again, the net NPA is nothing but gross NPA minus provision made, as per regulatory directions, and this provision is made out of the profit and loss account. The net NPA does not indicate any improvement in the asset quality. It simply shows that adequate provision is made in the balance sheet for the ultimate write-off, if the need arises.
Only the actual recovery of NPAs will solve the problem of banks, not the mere ‘resolution’ of NPAs.
The statement by the RBI that “All bank groups recorded an improvement in asset quality, with PSBs experiencing a drop both in the GNPA and in the net NPA ratios”, has to be taken with a pinch of salt.
The writer is a retired banker