Mint Explainer: How the health of Indian banks has improved over the past decade
Mint takes a look at how the health of Indian banks has improved over the years. Data from the RBI showed that in FY14 — the fiscal year preceding the start of the NDA government’s first term — the gross non-performing asset (NPA) ratio was at 3.8%. The bad-loan crisis peaked in FY18, when 11.2% of loans had soured.
The number denotes total bad loans as a percentage of total loans and shows the extent of toxic assets in the system. A higher number means there is a greater chance that banks’ profits will be hit unless these bad loans are recovered. It also increases the amount of money banks must set aside to cover losses from bad loans, which also dents their profits.
In its Financial Stability Report released in December 2014, the RBI said that the growth of the Indian banking sector moderated further during 2013-14, with profitability declining on higher provisions for delinquent loans and lacklustre credit growth. Credit growth was on a downward trajectory, as borne out by RBI data. Bank credit expanded by 13.6% in FY14, from 15.1% in FY13.
Banks have for long been accused of kicking the can down the road on stress in their balance sheets by using various debt recast schemes and through evergreening – the practice of giving fresh loans to repay existing debt – which can create a vicious cycle of increasing debt to avoid classifying a loan account as bad and having to make provisions for it. Banks are required to set aside 15-100% of the value of a bad loan as a provision, depending on how long the loan has remained unpaid. Former RBI governor Raghuram Rajan said in a speech in February 2016 that there were two polar-opposite approaches to tackling loan stress.
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