NPAs or bad loans constitute almost 6% of the total advances made by PSU banks. This is the main reason why these banks are struggling to increase their businesses and in turn, provide the much-needed boost to the economy. Rising NPAs have forced banks to turn cautious about lending. This cautiousness has had a cascading effect as credit off-take has slowed down, which in turn has led to stagnation of economic growth.
Hence its obvious why banks are being pushed by everyone including government, RBI, etc. to identify bad loans and move on. The burden of past mistakes cannot be allowed to dent future growth. Banks on their part, are selling some parts of their bad loan portfolios to asset reconstruction companies. This approach needs to be followed more aggressively if banks want to clean up their books quickly. It might result in short term pain but it will go a long way in allowing banks to start lending money much more freely and bring money back into the system for future investments. Banks are also, at times turning debt into equity in companies of few borrowers and taking management control. But this is more like delaying the inevitable as banks are no experts in running business other than banks. Hence sooner or later, the equity too will lose value and cause serious Marked-To-Market (MTM) losses for banks.
The economy is also expected to gradually pick up as demand kicks in. Banks need to be ready to handle such increase in credit demand and not take a backfoot stating NPA worries. A major boost to bank balance sheets has been provided by central government’s move to push states to take up the bad loans of power companies and service them. This brings in the much-needed visibility about whether power sector loans will be paid off or identified as NPAs. It is clear that sooner or later, when the economy starts gaining speed, demand for big corporate loans will pick up. Hence banks need to quickly get rid of their NPA baggages before the demand returns. This will help banks provide the required stimulus to overall growth of the economy.