NPAs

Neo-liberal banking reform was launched in the early 1990s to address the low profitability of the public banking system and the large presence of non-performing assets. It set itself the objectives of cleaning out NPAs, recapitalising the banks and modifying banking practices to restore profitability and drastically reduce NPA volumes. This did initially have some effect. However, while the NPA ratio fell between the early 1990s and the mid-2000s, it has risen sharply since then. Moreover, while earlier priority and non-priority loans contributed equally to total NPAs, more recently, large non-priority loans to the corporate sector account for the bulk of NPAs. An analysis of these features reveals that these trends are indicative of the failure of neo-liberal banking reform in India.

The slowdown in the economy and the resultant rise in bad loans have led to criticism of public sector banks and questioning of their raison d’être. While there is a rush to find a quick solution by merging PSBs, it would be wise to examine the ground realities closely. India needs a mix of efficiently run PSBs and aggressive private banks to achieve growth and development along with social justice.

There have been signs of stress in the balance sheets of banks in an environment of increasing uncertainties and a fragile global economy. Weakening loan recovery rates not only forces banks to face the burden of higher provisions and limits their lending capacity, it also diminishes their profitability and solvency. Examining the determinants of recovery of defaulted loans by banks in India, the need for a stronger and effective insolvency regime is felt so as to improve the debtor-creditor relationship and credit environment. The importance of the presence of collateral, the type of collateral used, and a conducive macroeconomic environment towards recovery of bad loans are highlighted. There is a need for strengthening banks' credit appraisal system. Access to alternative resources facilitates loan recovery, highlighting the need for further development of capital market as a source for adequate resources for borrowers.

The politics and economics of interest rate formation in this country must be studied carefully. Lowering the interest rate raises stock prices in an environment where they themselves cannot move up thanks to the fundamentals of the economy that are not conducive.