India’s NPA problem is making all financial institutions from public banks to RBI scratch their heads, but the issue is far from getting resolved. Recently, 26 banks together reported gross non-performing assets of more than Rs 7.31lakh crore, about a 50% increase from the corresponding period last year. Of these, PSUs alone added more than 1lakh crore to the pool of bad debts since December 2017. In fact, losses in the banking sector are over 4 times more than their profits Such high number of NPAs has the ability to trap the economy in a never-ending vicious debt cycle.
Let’s try to understand how this vicious cycle works.
1. Banks give out loans to businesses
In order to increase their profits, state-owned banks try to credit as much money as possible. In the quest for achieving this goal, banks started giving out loans irresponsibly to big corporate players. These loans were sanctioned without evaluating the capability of the company to repay the loans.
In the end, the banks were left with a huge pile of unpaid loans that resulted in a decline in their profits. But the banks alone are not responsible for the entire debt crisis.
The government also shares a part of the guilt. How? Government officials allocate natural resources and licenses to steel, power and telecom companies in return for bribes. And it is not very surprising to see these companies top the list of biggest loan defaulters in our country.
2. Businesses start defaulting on loans
Several incompetent companies started defaulting on their loans, as they couldn’t generate enough profits. While there were few who could not pay the debts, there were others who deliberately did not repay the loans despite having the resources. These companies have the sole intention of ripping off banks and are termed as willful defaulters. And most of the times funds acquired by such companies through loans are used for purposes other than what is mentioned while seeking the loan.
This is evident from the Vijay Mallya case. Mallya took loans worth Rs. 7200 crore from various Indian banks. Despite the unpaid loans, he continued to live a lavish life. United Bank of India had called him a willful defaulter.
3. Businesses borrow loans from multiple banks
To cover up for the losses and pay up for their previous unpaid loans, businesses land up taking more loans from multiple banks. Despite a poor financial status of these companies, banks sanction the loans on demand without any hassle.
Banks don’t seem to realise their mistake until these companies turn their backs. And by the time these bad loans are unmasked there is little to no hope left for the recovery. The banks need to be sterner and need to better research the clients and companies to while granting loans.
4. Failed businesses lead to failed economy
Public banks grant loans to such an extent that unrecoverable bad loans, that for 10.15% of the total loans, bring banks on the verge of bankruptcy. The ever-growing amount of NPAs has put tremendous pressure on Indian banks while hampering their capacity to lend money to businesses. With no support from banks, the genuine companies who are in dire need of loans are suffering needlessly leading to an overall decline in the economic growth of our country.
5. Failed economy lead to more NPAs
And what do we do with all this NPA? Read here to know.
If businesses fall due to lack of access to economic aid, they are more likely to default on their pre-existing loans adding more bad loans in the financial records of the banks. This has given rise to a kind of situation where the previous bad loans are becoming the major reason for the growth in current bad loans.
If the problem persists and the economy keeps falling soon we may see banks repeating their money lending patterns but this time they will be forced to save companies from going bankrupt in an effort to save the economy as a whole.
Companies, on the other hand, will most probably take advantage of the situation. The number of wilful defaulters and business defaults will presumably increase bringing the economy to the same state as before turning the existing NPA crisis into a vicious debt circle.
The government has foreseen the crisis and has introduced several aggressive policies to tackle the NPAs which is a good sign but the efforts are still at a nascent stage and it can take a while before the success of these policies can be judged.