Will Indian Banks ever recover?

Banking sector is economic backbone of the nation. Lately Indian banking sector has been facing numerous problems like --- Rise in NPA, Twin Balance Sheet problem, and wilful default.

The Non-Performing Assets (NPA) and wilful defaults are serious concern.

During March 2019, the Reserve Bank of India postponed the implementation of the Indian Accounting Standards (Ind AS) norms for banks indefinitely. The reason was given that there is a need for amendments to be made by the government in the relevant banking laws. 

The Central government, which has been trying to bail out public sector banks without carrying out the structural reforms required to clean up balance sheets, might also prefer to delay the enactment of the legislation.

For the new norms will cause more outstanding loans to be added to the huge existing pile of bad loans and cause further headaches to the government.

 

Golan Heights Dispute

  According to estimates made by India Ratings & Research, public sector banks would have to make additional provision of over a trillion rupees if the norms are adopted right away.

The Centre may prefer to help public sector banks to hide the true size of their bad loans. This does not bode well for the health of the banking system as banks that do not recognise their problems might not resolve them.

What is NPA?

Non-performing assets or commonly known as NPA’s are assets which do not generate any income to the bank whereas the money given in form of loan stays stuck.

 

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A wilful defaulter is an entity or a person that has not paid the loan back despite the ability to repay it. 

What did Indian government do to help the banking sector?

Indian government in recent years had a series of reforms like GST and demonetization etc, which also caused positive and negative impacts on industries. However, to prevent problems in Banking sector government has taken following steps-

1.    Insolvency and Bankruptcy Code

It was introduced to reduce burdens of NPA, where business can be declared as insolvent and certain profit can be generated by those firms.  

2.      Bad Banks

Bad banks or assets management companies will deal with stressed assets of PSBs. Some examples can be considered for learning purpose like Swedish bank ‘Securum’ that worked for 15years and was fully owned by the government.

What are Bad Banks?

A bad bank is a corporate structure to isolate illiquid and high risk assets held by a bank or a financial organisation, or perhaps a group of banks or financial organisations.

3.      Credit Registry System

 The credit registry system was introduced for tackling the rising NPA’s problem. As most of the time the decision to give credit is left on management which may further lead to the problem. So, the government has decided to introduced the credit registry system where lending decision will be based on the credit registry system

4.   Indian Accounting Standard (Ind AS)

The RBI had initially planned to implement the norms starting April 1, 2018 in order to bring Indian accounting standards in line with international standards, but the Centre’s delay in enacting the necessary amendments had given breathing space for banks for another year.

What will happen if Banks adopt Ind AS?

It is believed that the adoption of the accounting standard could cause significant credit losses to banks, which will be forced to prematurely recognise losses on their loans and build up the necessary underlying capital required to overcome the impact of such losses.

Under the proposed norms, financial institutions like banks will have to calculate expected credit losses (ECL) on their loans during each reporting period and make necessary adjustments to their profit-and-loss account even before a borrower may default on a certain loan.

This is in contrast to the present accounting norms wherein banks incur credit losses in their books only after outstanding loans have been in a state of default over a certain number of days as stated in the rules laid down by the RBI.

Given the losses they would likely have to incur, it is understandable why banks would try to avoid adopting the accounting norms for as long as possible.

Unemployment in India

 So, the delay in the implementation of the Ind AS norms is not surprising at all. Further, to adjust to the new norms, banks will have to improve their ability to forecast future credit losses with precision. Until this happens, bank earnings could experience volatility

A way ahead

Indian banks need to do structural reforms and follow the international norms. Though delay can bring the temporary relief, but the solution based approach should be followed. Without repairing the system, one can not expect the system to run efficiently, same principle should be applicable in banking sector before, it is too late. 

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