Number Theory: Has the NPA crisis killed India's animal spirits?

This is the second of a two-part series on macroeconomic lessons from India’s bad loan crisis. The first part looked at the mechanics of fall in NPAs.

The first part of this series looked at the significant reduction in Non-Performing Assets (NPA) in India’s banking system. While a fall in creation of new NPAs has helped, the write-off of bad loans and recapitalization of government banks using taxpayer’s money has also played a big role in bringing down NPAs. Are write-offs and fiscal recapitalization of banks a closed chapter in India’s bad loan saga in the last decade? There is good reason to argue that the scars of India’s bad loan crisis have also led to subdued investment spending in the economy, which also means weaker tailwinds for current and future economic growth. Here are four charts which explain this argument in detail.

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Has the NPA crisis killed India's animal spirits?

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  The supply of bad loans came predominantly from government-owned banks

  If one were to look at the relative share of PSBs in total GNPAs – relative share is defined as PSB’s share in total GNPAs divided by their share in total loans and advances – this number has been always more than one except in the year 2008-09. The number peaked at 1.3 in 2017-18 and has not come back to historical levels since then. To be sure, it is eminently likely that PSB’s relative shares in the pre-Asset Quality Review (AQR) – a special drive by RBI to ascertain the quality of NPAs in 2015 – period are underestimates because of window dressing of bad loans by restructuring.
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  And the demand side story was dominated by large borrowers

  The supply side dominance of PSBs in the bad loan crisis has a counterpart in the dominance of large borrowers on the demand side. In 2017-18, which is when the crisis was at its peak, just 4,387 borrowers had ₹8,59,532 crore in NPAs for SCBs according to a government reply in Lok Sabha. This number was 82% of the total outstanding GNPAs on March 31, 2018. According to a Right to Information (RTI) response by RBI to Prasenjit Bose on October 6, 2023 – HT has a copy of the document – the top 100 NPA accounts for Scheduled Commercial Banks (SCBs) had loans worth ₹1,42,206 crore. For PSBs this amount was ₹1,18,719 crore. When read with overall NPAs of SCBs and PSBs, the NPAs of top 100 borrowers come to 24.9% and 27.7% of their total NPAs. The picture becomes clearer when read with what the government told Parliament earlier this year. “Amount outstanding of scheduled commercial banks (SCBs) to corporate company borrowers, classified as non-performing assets (NPA) and having amount outstanding of ₹1,000 crore or more was ₹1,03,975 crore as on 31.3.2023,” the minister of state for finance Bhagwat Kisanrao Karad told the Lok Sabha on July 24, 2023. This means that 73% of the money owed by top hundred NPA accounts was from borrowers with a ticket size of ₹1,000 crore or more.
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  But this perverse demand-supply interplay also triggered investment and growth

  Numbers show this clearly. The decade of 2000s was the best in India as far as investment – as measured by Gross Fixed Capital Formation – and GDP growth is concerned. A sector-wise analysis of contributors to overall credit growth from 2007-08 onwards also shows that the importance of industry in driving credit has fallen and personal loans have emerged as the bigger driver of credit growth in the recent period. While there are no immediate signs of stress on personal loans, RBI has been flagging their rapid growth as a cause for caution.
• What does this mean for India’s medium- to long-term growth?

  In hindsight one can argue that India’s growth boom in the 2000s was driven by an irrational exuberance of lenders and borrowers. Once the Global Financial Crisis (GFC) erupted, the boom ended and it left a toxic and expensive mess. The Twin Balance Sheet crisis scarred both borrowers and lenders in the economy and sobered their expectations of its growth potential. This is exactly what explains the subdued credit demand from the industry. While there is good reason to stay careful against another bout of irrational exuberance one also needs to ask whether prudence means that the Indian economy will never attain the kind of investment and growth it had in the pre-GFC period. This matters in raising per capita GDP and India must continue to look for and debate a sustainable high growth path.