As the current dispensation reaches near midway in
its 4th year at New Delhi, questions – hard questions – are beginning
to emerge on its overall performance till date. The heartening thing in this is
the surprising development of the main point at centerstage in the current
public discourse, which is turning out to be the economic performance so far.
Even some of its own party members and allies have come out against its
policies or performance. For once, I can only say that it is nice that we are
actually having a national dialogue around The Economy, which is very welcome.
THE NPA PROBLEM
There are several parameters of the Economy that we
can discuss; here, I concern myself, in this article, around only one : The NPA
problem that Indian Banks are facing. I would like to refer interested readers
to the annotated article link in the Bibliography section, which is a report
carried on the RBI Website wherein all the technicals are mentioned with data.
My main driving concern in this article is the business side of the argument,
rather than an economic side, which is only a secondary consideration for me as
of now.
ARE WE
PAST 2007?
I had earlier, in my analysis of Gold, asked the
question, have we really emerged from the aftershocks of the Subprime Crisis,
even now – 10 years later? A cursory glance at the numbers related to NPAs
gives us a very interesting insight: NPAs were in negative territory in terms
of growth in Gross NPAs in the run-up to the crisis {Look at the yellow line in
the chart} – and then moved up after 2007, when the crisis hit home. Since then
it hasn’t headed south. Bank credit also expanded at a much faster pace before
than after the crisis {the blue line}; since then, till 2012/3, the numbers
were subdued in comparison. I ask this
question once again – are we fully out of the aftershocks of 2007? Stay
connected with my blog as I attempt to answer that through my own self-study
GOING
DEEPER
Moving on, in the period from 2003-2007, as seen in
the next chart below, net additions to NPAs were in negative territory; but
again, after 2007, they went north, way north – hitting all time highs by the
year 2012. And it is from this point that
my argument diverges; most pink journals, publications focus on the banks. The
enclosed RBI publication makes several observations around the Credit Risk
Assessment in Indian Banks, which can decidedly be a lot better; but that is
beside the point. Examine this data once again – especially the breakup of NPAs
between the priority and non-priority sectors. {Priority Sectors – Bibliography
point 2 - are Agriculture, MSMEs, Export
Credit, Education, Housing, Social Infrastructure, Renewable Energy, Advances
to weaker sections & Loans upto Rs. 50,000 provided the individual
borrower’s household annual income does not exceed specified limits}.
It is the non-priority sector which has contributed
significantly to the spurt in NPA growth. In fact, the rise in NPAs in the
last2 years of the dataset – 2011-13 shows a sharp rise in NPAs in the
non-priority sector of the economy; whereas the priority sector was almost flat
in this period. Since the last decade, the share of priority sector in gross
advances averaged at over 32 per cent, while its share in total NPAs remained much
higher, averaging at around 45 per cent – Chart below. A deeper look at these numbers, in the next article, gives more
clarity, with mid-corporate segment accounting for the largest growth in loans
in one bank at least.
One side of the debate defends the Government saying
this is a longer-term problem; the data bears this out faithfully, to be
honest. However, we cannot pass judgement on that alone, as that would be
cherry picking facts to suit a hypothesis; we need to look deeper, and at many
other factors before we can arrive at that conclusion. For the other indicators
do not bear out this hypothesis, as I looked at in one previous analysis. And yet, it is undeniable that this is a
longer-term issue, with deep reasons underneath. We need to ask – why should
these loans go bad? And the divergence in the MSME and other areas in terms of
NPAs needs a deeper look as well!
WHY
SHOULD THESE LOANS GO BAD?
Now, if a loan goes bad, and the borrower is unable
to repay – provided there is no malafide
intent – it clearly means that cash flows were not to the tune expected.
Business is conducted only for the purpose of cash flows & performance. This can arise from two or three reasons,
{from the business perspective} namely :
1.
Either capacity has been
generated but cash flow {sales} do not total cover costs, or
2.
Expenses overshot the plan
3.
Deep – seated structural
issues
It is being said that the banks’ risk assessment can
be improved; I don’t argue with that – but I humbly submit, in light of the
simplified analysis in the above paragraph, that there is another side to it. And that is simply, firstly that these were
business decisions that went bad, meaning that these decisions were taken on
unsound business principles, or had no longer-term deeper thought in them, or
that they were hit by unforeseen problems. Note – unforeseen, not
unforeseeable. And that is the most significant aspect we should look at – the decision
makers, and the borrowers. Lastly, it also could indicate structural issues; cyclicity
of the business cycle is no excuse. And
that is what I lay out in greater detail in the next part of this analysis day
after tomorrow
FIRST
PART SUMMARY
In the article above, I look at, firstly, 10 years
longer-term NPA Performance, its bifurcation along priority / non-priority
sectors, divergence in the trendlines between these two; and the business case
for loans going bad. Reason to go deeper is to avoid cherry picking data just
to prove a hypotheses, and get to the gist of the real problem. And the reason to study the NPAs is simply
that these provide case studies of where we went wrong as an economy, as a
leadership, as a people. These are national resources – and we can learn from
our mistakes. Stay connected as I progress on this journey basis authentic
data; let us learn together…
Very informative article
ReplyDeleteThanks Nidhi!
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