The loan quality of banks in India seems to have deteriorated in the last one year that it has attracted the attention of RBI. The data released by RBI about the loan quality and NPA is both scary and disconcerting. As per the data the banks stressed assets (bad loans plus restructured standard loans) rose to 9.2 percent as of March 2013 advances as compared 7.6 percent as of March 2012.
Why is this happening? Several reasons are cited. Let us list them.
- Domestic economic slowdown
- Poor credit appraisal
- Failure of banks to monitor the loans
- Higher credit concentration in certain sectors
- High leverages used by companies
The gross NPA has grown from Rs. 1.42900 trillion rupees in FY 12 to Rs. 1.94000 trillion rupees in FY 13. Given the current economic slowdown this financial year, the gross NPA will reach new highs.
All sectors of the economy namely the agriculture, non-priority sector, small sector have seen the NPA increase. The implications of the increased NPA are far too many. Let us list them.
- Future lending activity will become extremely cautious
- Many activities that deserve funding will not get it
- To offset possible write offs the banks loanable rates will go up
- The banks will squeeze the depositors for all the mistakes they have made
- The rating of banks will be affected
India needs lot more banks to improve economic growth. As of now there are about 90 banks with 100000 branches. Our population is 1.2 billion. In other words we have a bank branch for every 12000 people. Recently RBI has announced that it will issue licenses for the creation of new banks.
Finally due to general global economic slowdown, our economy will do badly in FY 14 with growth below 5%. Given the high rate of inflation in double digits, it wouldn’t be a surprise if the meagre savings of the people found its way into gold and real assets rather than as bank deposits. Clearly a battle line is being down and the bank will be the ultimate looser which directly will affect the bank services. It is a hope that RBI will step in and guide our banks to improve their loan quality.