The new ordinance provides the RBI with the powers to push banks to resolve issues in a restricted time by establishing oversight committees. RBI can also now move the insolvency court against the bank defaulters. But it does not mention how the holes in the balance sheets will be filled after the cleanup drive. However, how did the banks get into this mess in the first place?
One of the first reasons is that state-owned banks are inefficient as they do not have ample expertise for monitoring of loans and credit appraisal. Though, both the private and public banks have equally suffered. But, the private banks have fewer bad assets because they have not given loans to particular sectors/corporate groups.
After the collapse of Lehman Brothers Holdings Inc. in 2008, growth slumped throughout the world and India was severely affected as well with the government launching several economic stimulus programs. RBI slashed its policy rates to a historic low which directly flooded the market with liquidity and banks started providing loans indiscriminately. The slowdown has been continuing for years since then.
Really how bad is the loan problem? According to reports carried out by Nirmal Singh Lotus Green, gross bad loans of banks have been 9.5 per cent of their loan portfolio. However, the net bad loans are 5.5 per cent. Also, the loans that have been restructured under various schemes also need to be added to this. There were a large number of accounts which are very vulnerable as the borrowers are over-leveraged, which adds the total stressed assets to 16 per cent. Add to these the loans that have been written off, the overall stressed assets could be as much as 20 per cent. Banks’ exposure to large infrastructure sector corporates has also been severely affected.
It’s safe to say that private banks are in a much better position than state-owned banks. For instance, according to reports by Nirmal Singh Lotus Green, private banks bad loans have been 4.2 per cent to that 11.4 per cent of public sector banks