economic recovery

The solution for India’s Rs 1,00,00,00,00,00,000 bad loan problem is still nowhere in sight

The pile of stressed assets in Indian banks is more than the GDP of several countries.

Indian banks are in deep trouble.

Their pile of bad loans, or stressed assets, is close to Rs 10 lakh crore now, which is more than the GDP of at least 137 countries. And what’s more, it is only growing.

Stressed assets, which include non-performing assets and restructured loans, form some 12% of the total loans in Indian banking now.

NPAs are loans that borrowers have stopped repaying – either the principal or the interest – with slim chances of recovery. Gross NPAs among Indian banks have shot up by 135% between December 2014 (Rs 2.61 lakh crore) and December 2016 (Rs 6.97 lakh crore). In March, the average bad loans of public-sector banks, which account for 70% of India’s banking system, stood at 75% of their net worth. Restructured loans are those for which the banks have relaxed the terms and conditions in the hope of recovery. But then, the probability of default still remains high.

By now, the condition is so bad that for every Rs 100 that they lend, Indian banks are likely to get back only Rs 88.

The genesis

Trouble began in 2008 following the collapse of Lehman Brothers and the resultant global slump. Till then the Indian economy had been cruising along on a wave of optimism. Between 2006 and then, it had grown at around 9%-9.5%. So, companies borrowed aggressively for expansion. When the slowdown came in 2008, it played havoc with corporate repayment abilities. Banks have turned cautious since, and by February, loan growth had hit an all-time low of 3.3%.

The corporates in India account for a major portion of bad loans. The top-10 business group borrowers alone have to repay Rs 5 lakh crore to banks. Some of the businessmen – Vijay Mallya, for instance – have failed to cough up the money even though they have the ability to pay, resulting in the banks declaring them wilful defaulters.

The RBI, as well as the Supreme Court of India, had to eventually step in to tackle the issue.

Yet, despite the steps taken by the banking regulator under its former governor, Raghuram Rajan, and his successor and current chief, Urjit Patel, nothing much has come about it.

RBI’s measures

In February 2014, the central bank introduced the joint lenders forum which allowed multiple banks that had extended loans to a specific company to consider a collective mechanism to resolve the problem. However, the lenders seldom agreed with each other and recoveries remained dismal.

Then the RBI introduced the strategic debt restructuring scheme in June 2015, a new version of the failed corporate debt restructuring scheme of August 2001. This allowed banks to buy a stake in defaulting companies by converting debt into equity. However, once again, it met with little success as banks were still dependent on promoters for the resolution. Besides, finding buyers for this equity was often difficult.

A year later, in June 2016, the banking regulator introduced a scheme for sustainable structuring of stressed assets. This let banks restructure large loans where the projects were up and running. Evidently, the scope of this scheme is limited as it is applicable only to active projects.

One reason for the RBI’s measures not bearing fruit, bankers say, is the slump at the ground level that was not reflected in India’s big GDP numbers. “Bad loans are a culmination of the economy’s slowing down, stalled projects, and licences of players from some industries (iron and steel, mining, telecom) being called off,” explained N S Venkatesh, executive director at Lakshmi Vilas Bank, a private lender.

Most recently, on June 14, the central bank directed that the top 12 large borrowers, which account for 25% of the bad loans in the country, be immediately taken to bankruptcy courts. “This new move is likely to speed up things,” said a CFO of a Mumbai private bank, requesting anonymity. “It spells that we don’t need to coerce and coax the promoter to co-operate with us. Now, the creditors are in control and this move of showing the stick to the promoters is what was required,”

Experts say that the other mechanisms failed because the central bank does not have any significant influence on promoters and shareholders of defaulting firms. “The RBI does not regulate promoters and other equity stakeholders…as a result, they cannot force resolutions on to them,” Nikhil Shah, managing director at Alvarez and Marsal, a consultancy specialising in turnarounds, told Bloomberg in March.

However, banks themselves are unable to form a consensus on a resolution process, prolonging the bad loan crisis, said Karthik Srinivasan, an analyst at credit rating firm Icra. “But with the RBI directing banks to take 12 accounts directly to the bankruptcy court, the power has now shifted from the squabbling banks to the regulator and this will hasten the process,” Srinivasan said.

Others remain cautious, though.

“The steps taken by RBI, including the recent insolvency mechanism, are in the right direction. But these are not magic wands; it is going to take some time before the crisis can be resolved,” Venkatesh said.

The solutions

The process of recovery in India is usually extremely long, sometimes taking up to 15 years. On average, India takes over four years to declare a promoter or a company insolvent, which is more than twice the time taken in China and in the US, according to the World Bank. So, Indian banks recover only 25 cents to a dollar in India, compared to 36 cents in China and 80 cents in the US.

While the new bankruptcy law passed in May 2016 aims to shorten this time period, the framework to implement it still isn’t in place.

To solve these sticky issues, policy makers and experts have been discussing possible solutions.

One among them is the creation of a government-controlled bad bank – an entity that will hold NPAs and stressed assets of firms suggested by credit ratings firms and even private equity majors like KKR. “A bad bank might provide a way around some of the problems that have led Indian banks to favour refinancing over resolving stressed loans,” credit ratings firm Fitch said in a February 24 note. “For example, large corporates often have debt spread across a number of banks, making resolution difficult to coordinate. The process would be simplified if the debt of a single entity were transferred to one bad bank.”

This has had its share of critics, though.

Meanwhile, re-capitalisation of state-owned lenders is important, too, considering their overwhelming domination of the industry. Equity infusion will push up assets, in the process bringing their bad loans-to-net worth proportion down from 75%. But the capital infusion requirement of government-owned banks is massive. The top PSBs in the country alone will need some Rs95,000 crore to maintain healthy financials, credit ratings firm Moody’s says.

The government’s plans are much smaller, though. In February, it announced Rs10,000 crore for this purpose under the Indradhanush plan in the next financial year.

Clearly, a way out of the woods is still out of sight.

This article first appeared on Quartz.

We welcome your comments at
Sponsored Content BY 

The pioneering technologies that will govern the future of television

Home entertainment systems are set to get even more immersive.

Immersive experience is the core idea that ties together the next generation of cinematic technologies. Cutting edge technologies are now getting integrated into today’s home entertainment systems and challenging the limits of cinematic immersion previously achievable in a home setting. Here’s what you should know about the next generation of TVs that will grace your home.

OLED Technology – the new visual innovation in TVs

From the humble, grainy pictures of cathode ray tube TVs to the relatively clarity of LED and LCD displays, TVs have come a long way in improving picture quality over the years. The logical next step in this evolution is OLED displays, a technology that some of the best smartphones have adopted. While LED and LCD TVs make use of a backlight to illuminate their pixels, in OLED displays the pixels themselves emit light. To showcase darkest shades in a scene, the relevant OLED pixels simply don’t light up, creating a shade darker than has ever been possible on backlighted display. This pixel-by-pixel control of brightness across the screen produces an incomparable contrast, making each colour and shade stand out clearly. OLED displays show a contrast ratio considerably higher than that of LED and LCD displays. An OLED display would realise its full potential when supplemented with HDR, which is crucial for highlighting rich gradient and more visual details. The OLED-HDR combo is particularly advantageous as video content is increasingly being produced in the HDR format.

Dolby Atmos – the sound system for an immersive experience

A home entertainment system equipped with a great acoustic system can really augment your viewing experience far beyond what you’re used to. An exciting new development in acoustics is the Dolby Atmos technology, which can direct sound in 3D space. With dialogue, music and background score moving all around and even above you, you’ll feel like you’re inside the action! The clarity and depth of Dolby Atmos lends a sense of richness to even the quieter scenes.

The complete package

OLED technology provides an additional aesthetic benefit. As the backlight is done away with completely, the TV gets even more sleek, so you can immerse yourself even more completely in an intense scene.

LG OLED TV 4K is the perfect example of how the marriage of these technologies can catapult your cinematic experience to another level. It brings the latest visual innovations together to the screen – OLED, 4K and Active HDR with Dolby Vision. Be assured of intense highlights, vivid colours and deeper blacks. It also comes with Dolby Atmos and object-based sound for a smoother 360° surround sound experience.

The LG OLED TV’s smart webOS lets you fully personalise your TV by letting you save your most watched channels and content apps. Missed a detail? Use the Magic Zoom feature to zoom in on the tiniest details of your favourite programs. You can now watch TV shows and movies shot in 4K resolution (Narcos, Mad Max: Fury Road, House of cards and more!) as they were meant to be watched, in all their detailed, heart-thumping glory. And as 4K resolution and Dolby Atmos increasingly become the preferred standard in filmmaking, TVs like LG OLED TV that support these technologies are becoming the future cinephiles can look forward to. Watch the video below for a glimpse of the grandeur of LG OLED TV.


To know more about what makes LG OLED TV the “King Of TV”, click here.

This article was produced by the Scroll marketing team on behalf of LG and not by the Scroll editorial team.