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The Renewed Fear of Bad Debt
The evidence of a decline in the non-performing assets ratio in India’s banking system points to a significant improvement in the health of banks. However, this may have occurred partly through the use of write-offs that erode the capital base of banks and also because of the time-bound moratorium on debt repayments announced as part of measures to address the effects of the pandemic on small units and other selected borrowers. In the circumstances, even though new pandemic-linked lending to micro, small and medium enterprises was partly guaranteed by the government, a rise in the NPA ratios and further erosion of bank capital seem inevitable.
Even as India’s banking system appeared to be on the road to resolution of its bad debt problem, fears of a recurrence have surfaced. This is despite the fact that the gross non-performing assets (GNPA) ratio of scheduled commercial banks, which peaked at over 11% in March 2018 (more than 14% in the case of public sector banks), is on the decline. It is placed at a much better 8.2% in March 2020, 7.3% in March 2021, and expected to have fallen below 7% in September 2021, based on provisional data.
One reason for the decline in the GNPA ratio was large write-offs, as banks decided to either settle defaults for a pittance or resort to technical write-offs, pending recovery, if any. Ever since 2017–18, more than 20% of the reduction in NPAs was on account of write-offs, with that figure reported at 23.1% in the pandemic year 2020–21. According to the Reserve Bank of India’s (RBI) “Report on Trend and Progress of Banking in India 2020–21,” `2.08 lakh crore were written off by banks over 2020–21.
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