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The Plunging ‘Hairline’: A Curious Story of Indian Banks NPA

or Haircut, if I may say! Not sure? Then just have a look at the following data from RBI data. From as high as 22% in FY13, the recovery success rate has been seeing steep fall ending up at a notch below 10% by FY17 (9.8%). That means if there is 100 cr that was involved in the cases marked for recovery, only 10 crore actually got recovered by the banks. That means that the haircut for banks has been at an average of 90% for cases it had to push for DRT/ Lok Adalat or under SAFRESAI.

Recovery % is calculated as amount recovered by banks as %age of Amount involved in the cases referred to the different channels of recovery (DRT, SAFRAESI, Lok Adalat)

A closer look at the channels of recovery throws a few more interesting insight. All the 3 channels have shown marked fall in recovery rate (except a northward blip for DRT in FY17). Lok Adalat contributes 95% to cases by volume but only by 37% by amount involved and the lowest recovery rate at 4%.

The recovery rate looks slightly better at a broader scale when we compare reduction of GNPA as %age of GNPA at end of previous year. This will include cases where banks were able to close/ recover w/o referring the cases to either of those 3 channels mentioned earlier.

  1. Recovery %age for SBI (23%) is better among the PSU banks (17%)- FY17
  2. Private sector banks does a better job (42%) in recovery compared to PSU (23%-SBI, 17%-rest)
  3. While recovery rates have dropped for all categories of banks below, the steepest fall was seen by PSUs

Moving on to “Write-offs“, an interesting observation is that Private sector banks have written off more (as %age) compared to their nationalized peers! They were also the worst in terms of %age addition, means that controls had started to fall off for them as well in last couple of years. This is also reflected in the high NPA reported by the likes of ICICI bank, Axis and even Yes bank in recent quarters.

In a recent interview SBI Chairman Rajnish Kumar said “No, I don’t think 60% haircut would be a norm. I would say the reverse. On a portfolio basis, we should be able to recover about 55% to 60% in certain sectors. So the haircut will be about 40% to 45% on an average at a portfolio level. In some individual cases, it could be higher or lower”. Considering the current ratio standing at meagre 23% for SBI, he is asking for an uphill task, notwithstanding a marked fall in recovery rate for cases going to DRT etc. Obviously, in one-off cases, if there is a good recovery from a very large defaulter (e.g. Kingfisher Airlines) then it can have a good impact on rationalizing haircut and also creating an example for future defaulters to act better!

Obviously the effect of ‘dirty banking’ is becoming quite apparent. Not that the economy is immune to this dirty play!!! The effect is well manifested in the shrinking of the banking credit flow to industry which also raises the cost of capital for the industries, with worst impact for SME & MSME’s. From a high of 210822  INR Billion in FY15 (April-Oct), it had fallen to 183284 by FY17 (April-Oct), a steep 13% drop

The other important dynamic aspect of banking credit flow to industry is the sectorial recalibration as a few became pariah for the banks while a few got into ‘favor of the season’ (FY17 vs. FY15- April-Oct). An intriguing part is that despite the hue & cry, Gems & Jewelry saw only 1% dip in sectorial allocation. Infrastructure (Power, Telco, Roads etc.) saw 5% dip but Construction saw 13% rise in sectorial allocation of banking credit

To summarize, banking sector effectiveness either by way of right selection of credit candidates or by having right systems/ controls or recovery mechanism to minimize impact of bad credit has shown marked deterioration in last few years. This may also be an indicator of increasing instance of compromised governance either due to individual greed & corruption at banking level or due to higher interference of North Block!!! This has a very destructive interference effect as declining economy contributes to increase of NPA and increasing NPA contributes to lower credit flow to industry strangulating the later more! This takes us to a economic concept that was discussed, at large, by Stigliz on the need to increase the credit flow when economy is down and that can be primarily driven by Governmental investment/ expenditure.

 

Source:

RBI: Trends & Progress report 2017, Indian Banks Statistics

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