INDIA’S WAR CHEST TO BATTLE BAD LOANS.

As we all know, the Indian banking sector has been dealing with a huge problem of NPA’s (Non-Performing Assets) for a long time now. It was being taken care of by a large amount of capital infusion, especially by the RBI but after the corona-virus pandemic surfaced, the problems have increased manifold. Due to this, the Indian banks have started to build a $13 billion, war chest, to battle the bad loans.

India is expected to fall into recession in this fiscal year due to the pandemic, the count rising to approximately 32 lakhs with 56,000 deaths. The most worrisome thing here is that, this will be the first recession that India faces, since 1980. We, as a country didn’t face a recession even during the Balance of Payments fiasco in 1990 and also during the Global Financial Crisis of 2008. So we can now understand the depth of the problems that is being faced by the economy of the country,at this stage.

In a recent report by the RBI, they have stated that the ratio of Non-performing assets to the Total Advances (the total amount of loans that the banking sector has given to the public) , which was 8.5% in March,2020, could go up to 12.5% in March, 2021, if the situation isn’t brought under control. In the Central bank’s Financial Stability Report it has been stated that the NPA could go over 14.7% if it isn’t controlled as soon as possible.

The governor of RBI, Mr. Shaktikanta Das, advised the banks in early July, to build up their capital reserves in preparation as the lock-downs would lead to erosion of the banks’ cash reserves.

What was the outcome of this advice?

The banks started a fundraising spree, using debt instruments, equity offerings etc as the pandemic threatened to turn loans into a money/cash sucking machine for the banks.

Banks that joined the fundraising spree:

1. Axis bank- has raised Rs.100 billion by issuing shares to qualified institutional buyers at the rate of Rs 420.01 apiece.

2. ICICI bank- the country’s largest private sector bank has also raised a sum of Rs.150 billion as funding.

3. SBI- the biggest lender of the country, SBI has also announced that it will be raising a sum of Rs. 250 billion to maintain its capital requirement.

4. HDFC bank- one of the country’s biggest mortgage lenders, HDFC, has also closed a deal to raise up-to Rs.140 billion through debentures, warrants and shares.

On adding all of these funding values, we come to the value of $13 billion.

Let’s take a look at the bigger picture here. The Indian banking sector has been reeling under stress for quite some time now, NPAs being the foremost reason. But there is another reason too. As we all know, lending money i.e. loans, and earning interests through these loans is the primary income for the banks. In today’s scenario, the borrowing has also drastically decreased. Many businesses have stopped operating completely or temporarily and also people have almost stopped taking loans for cars, houses, etc, the luxury items. This situation is impacting the state-run banks (PSU/ PSB) more than the private banks. In my opinion, privatizing as many PSUs as possible might help them generate the capital requirement in a more efficient manner.

What is the actual cause of this increasing NPA?

1. According to some economists, the ILFS crisis (Infrastructure leasing and financial services), 2018, is still showing an impact on the financial companies.

2. The ongoing pandemic.

3. The loss due to loans will not decrease until the bank’s exposure to stressed sectors isn’t decreased.

The only way that this can be solved is through intense capital infusion by the government. The government has already pumped in about Rs. 3 trillion over the past 5 years.