Banks must focus on loan recovery
The Indian banking industry saw its own sling-shot moment recently with the twin balance-sheet problem transforming into a twin balance strength. As the asset quality of lenders improved, the sector posted a record net profit of Rs 2.4 lakh crore in 2022-23, a 38.4 percent growth in a year. The most satisfactory performance came from public sector banks (PSBs), whose aggregate net profit stood at about Rs 1.05 lakh crore following years of heart-burning losses. If in 2018-19, nine state-run banks reported losses owing to high provisions, they all turned in profits five years later in 2022-23. IDBI Bank, which had reported the biggest loss among all state-run lenders, reported decent numbers last fiscal, notwithstanding steep interest rate hikes. PSBs have fared well across financial metrics, including profitability, margins and asset quality.
In particular, the ratio of gross non-performing assets (NPAs) or bad loans, fell to a ten-year low of 3.9 percent in 2022-23 from a peak of 11.5 percent in 2017-18. The gross NPAs of PSBs, which reached a peak of 14.6 percent in 2017-18, fell to 4.97 percent in 2022-23. But loan recoveries remain a concern. In August, the government informed parliament that banks had written off Rs14.56 lakh crore in the last nine years. In the years between 2017-18 and 2021-22, PSBs alone wrote off Rs 7.34 lakh crore and managed to recover just 14 percent of the written off loans. In 2022-23, banks wrote off another Rs 2.09 lakh crore, prompting the regulator RBI to direct banks to redouble efforts on loan recoveries.
The biggest setback comes from the Insolvency and Bankruptcy Code, which was introduced in late 2016 to specifically deal with sagging loan recoveries. On the last count, the overall recovery via the insolvency regime stood at Rs 3.16 lakh crore, or 32 percent of the admitted claims. Still, the Economic Survey believes that the Code has been the great measure, as 67 percent of the 5,893 corporate insolvency claims admitted since inception had been closed by September 2022. Perhaps one of the reasons for low recoveries is that 46 percent of the closed claims ended in liquidation. The fact remains that the average bankruptcy resolution takes much longer than the statutory limit of 330 days. What we need is a time-effective resolution process that can avoid value erosion.