Recently the RBI announced that our public sector and commercial banks carry huge amounts of non-performing assets and restructured loans in their books amounting to 10 percent of all lendable funds. Overseas agencies are predicting that this will raise the 14 percent. It is a scary scenario. Why and how did this happen?
First, we can speculate that the Indian banks are highly leveraged and poorly run. Some serious loan losses threaten bank’s solvency. For example a bank leveraged 20 to 1 only needs to lose 5 percent of its assets through loan losses and it is insolvent.
In India, in the past, farmers were given loan by the banks and they were never repaid. Indian government wrote off 60000 crores. Our banks have lent very large amounts of money to big businesses that many of them have no ability to repay. According to our finance minister, several thousand crores are required to recapitalize our banks.
Can this practice continue? If it did, what will be the result? The sub-prime crisis of 2008 taught us a big lesson. Several thousand savings and loan associations went belly up and this almost drove the US economy into a recession. Thanks to the quantitative easing (QE1, QE2 and QE3) the US bailed out of the situation. But when this money is eventually withdrawn from the economy there is a likelihood of serious recession in the US.
It is the time for the new government to realize the predicament that the banks are in and have to take timely action. The problem which is serious cannot be washed away.
We don’t need a crisis like the 2008 subprime. Let me end this blog with a conversation that I had with a businessman in real estate. He had borrowed 25 crore rupees from one of the banks. The real estate market is currently pretty dull and so he is not able to sell his units. He told me that he will not pay the bank loan or the interest. When I asked him as to how is it possible, he gave me a list of companies who have borrowed in thousands of crores and not paying back. He said that he will surrender the houses to the bank.
When the new government takes over in a few days, they should look into this matter most urgently. Otherwise, (like nobody predicted 2008 sub-prime) we may end up in a deep economic mess which can reduce our economic growth rate to a minuscule.