BAD BANK AND RESTRUCTURED LOANS: CURRENT INDIAN STORY – BY Dr. BOBBY SRINIVASAN AND Dr. SUDHAKAR BALACHANDRAN

November 17, 2014 | Posted by bobbysrinivasan << back to blog

The current bad and restructured loans in India have reached an intolerable level of Rs.6 lakhs crores. Many public sector banks’ bad loans and restructured assets put together are nearly 100% of their net worth which is really frightening. To cap it all, only one-third of it is provisioned for. Why is this happening and it is hard to understand as our economic growth has always hovered above 6%, save for the last 2 years when it fell below sub 5%. In the name of extending lifeline to some businesses, these restructuring has taken place. Given the possibility of global economic slowdown in the next couple of years, these restructured loans could become bad loans and this will only increase the possibility of systemic risk.
The government has announced that from April 2015, the existing regulatory forbearance on restructuring will no longer be available. In other words, the restructured loan will automatically be grouped under bad loans. The public sector banks will need massive amounts of money for recapitalizing, failing which some of them will go bankrupt.
These banks cannot expand their loan portfolios. The money available to industries and commercial establishment will shrink significantly. This will hurt new businesses which are looking for loans and the existing business may not find the money required to expand. One possible way the government can handle the situation is pumping money into the bank equity. But the government itself is running on a massive budget deficit. Currently we need an economic growth rate of 8-10%, possibly to prevent further loan losses. The bank profitability will then increase which then can be used to offset the losses.
The RBI on its part could come to the help of these banks by lowering the repo rate and possibly increase the reverse repo rate. Also they can pay interest on the cash reserve ratio. The interest could be linked to the 10-year bond yield rate.
Allowing some of the PSU banks to fold due to its bankruptcy would shake the confidence of both the local and foreign investor. A major culprit to the restructured loan is due to the infrastructure sectors inability to produce the cash flow. The banks could then decide not to lend anymore to this sector. Unfortunately, the present bank scenario is very scary and does not augur well.

<< back to blog

About Us

TERM ZERO

Media

Rankings

Accreditations

NIRF

Campus

Blog

Annual Events

Full Time Programs

PGPM

PGDM

EXECUTIVE EDUCATION

Corporate Programs

PGXPM

PGPM Flex

MBA in Business Analytics

Family Enterprises Management

Ranked 6 ^th

Faculty

Research

Centers of Excellence

Conferences

Campus Recruitment

Internships

Placement Reports

Leadership Series

Talent Listings

Ranked 6 th

Ranked 6 ^th