Avoiding another twin balance sheet problem
The Supreme Court order on Thursday offers interim relief to both banks and borrowers. If a borrower’s account wasn’t declared an NPA as on August 31, it shall remain standard until further notice. The stop-gap arrangement comes days after the six-month moratorium ended last month and days ahead of the release of the RBI-constituted Kamath Committee recommendations on a one-time loan restructuring scheme.
Had the court not intervened, sub-standard accounts could have become a source of irritation, with analysts expecting a 3-4% rise in NPAs. Importantly, the issue of interest on interest is still pending. While from a borrower’s perspective, the interest waiver demand appears genuine, for banks, it goes against the basics of banking business and robs them of invaluable interest income. Thus, the court’s verdict will be keenly watched.
As per the central bank’s own estimate, NPAs may nearly double to 14.5% of gross advances this fiscal if potential toxic assets are left unattended to. If bad loans rise once again, it’ll lead to predictable difficulties—raise credit costs, hurt state-run banks already staring at weak profits and deplete their capital base. According to Moody’s, banks will need nothing less than Rs 2 lakh crore in the next two years.
That’s more than half of the Rs 3.5 lakh crore the government had plonked down to recapitalise banks in the past four-five years. One way to lessen the government burden is to raise equity capital from markets, but that’s a no-go zone due to the uncertainty surrounding India’s economic recovery. It means that banks’ dependence on the government is inevitable at a time when the sovereign’s coffers are empty.
Also, will the loan recast rid banks off the NPA mess? Hardly. That’s because sectors like tourism, hospitality and services that depend on discretionary spending were adversely affected due to Covid-19. Unless demand picks up, borrowers can’t set their financial ducks in a row and repayments will suffer. A loan recast isn’t enough and the government must revive aggregate demand to avoid a reoccurrence of the twin balance sheet problem.