Bad loans: A fit case for surgery to clean up the bank books

  • Hindustan Times
  • Updated: Feb 13, 2016 00:45 IST
Dr Rajan said that banks can either apply band aid and hope for things to get better or try to get the projects started; the latter option might involve “deep surgery”. (Reuters)

Reserve Bank of India (RBI) governor Raghuram Rajan displayed a gift for understatement when he said that the financial results of banks in India have not been pretty. Indeed, with the country’s largest lender, the State Bank of India (SBI), reporting a 62% drop in profits amid a rising rubble of bad loans, it is only natural that the books of the other smaller banks will be even weaker. Most banks have reported sharp slides in profits pummelled by higher “provisioning” for non-performing assets (NPAs). SBI chairperson Arundhati Bhattacharya and a few of her peers have indicated that things could get worse in the current quarter. As expected, the markets have reacted sharply, resulting in a steep fall in share prices. The banking sector has been beset with bad loans, which have risen due to slow growth and delays in project implementation. Even at the cost of oversimplification, it would not be inappropriate to liken the problem of stressed loans to that of a wound that refuses to heal. Or as Dr Rajan put it: Banks can either apply band aid and hope for things to get better or try to get the projects started; the latter option might involve “deep surgery”.

The prospect of surgery is always a daunting one, often involving a series of carefully calibrated steps, even as the patient winces in pain. It is to their credit then that this is the option India’s banks seem to have chosen. An exercise to tidy up the bad loan books of accounts will have to start with the realisation of the magnitude of the problem; setting aside larger sums to provide for NPAs in the quarter gone by is an indication that lenders have come to recognise that the wound is too large to be allowed to fester any longer.

The State Bank of India’s net profit for its fiscal third quarter ended December slid 62 % to Rs 1,115 crore from Rs 2,910 crore a year earlier, while its provisions for bad loans almost doubled from a quarter earlier to Rs 7,645 crore. The government has laid down a road map to adequately bolster the state-owned banks’ capital base. This should keep the credit tap open for genuine businesses, ensuring that economic growth does not suffer. Meanwhile, a gradual improvement in the operating environment will eventually lead to slower additions to problem loans. There will clearly be a few quarters of pain ahead, accompanied by share price volatility. India should take this in its stride and allow banks’ credit metrics to stabilise over the next 12 to 18 months.

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