The issue of accelerating non-performing assets (NPAs) of banks is quite worrisome as it comes when the economy is not doing well and casts a shadow on the recovery story we are trying to narrate. Further, just at the time when we have reined in our CAD and fiscal deficit, the banking sector appears to be weighed down with lower quality of assets. This actually puts them under pressure, considering that there are other challenges that are being confronted such as Basel III, recapitalisation of banks and new goals on inclusive banking in an environment which is open to more competition. How serious is the issue?
The accompanying chart shows how gross NPAs of banks have grown over the last 10 years or so. There are broadly three phases here. The first is from FY05 to FY08 when NPAs declined and the ratio too came down from a high of 5.2% to 2.3% in FY08. This was also the period when the economy performed very well with growth averaging 8.9% per annum.
The second phase was one of relative stability with the NPA ratio crawling to 2.5% by FY11. In absolute terms, NPAs increased by an average of around R14,000 crore per annum. This was also a period of high economic growth with an annual average rate of 8.1%. Quite clearly, a good economic performance had corporates servicing their debt on time.
The third phase has been quite a disaster as the NPA ratio has started climbing upwards to 3.1% in FY12 and further to 3.4% in FY13, and is expected to go closer to 4.2% by FY14. In fact, the number of R2.43 lakh crore in the chart is for 40 banks as of December 2013, which accounted for around 98% of NPAs in FY13 (R1.80 lakh crore in FY13). Therefore, this number for the entire system will be higher than R2.43 lakh crore in FY14 depending on the accumulation of such assets in Q4FY14. This period has been characterised by one of the lowest growth periods with GDP averaging 5.4% (assuming 4.9% for FY14).
Quite evidently, NPAs have been related with growth conditions. Also, while growth in credit in the last phase was modest, it had been high in the earlier two phases, averaging 27% and 18%, respectively. Loans of long-term nature in the infra space sanctioned in the earlier years when the economy did well would have particularly been affected in