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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

How Indian banking sector is coping with bad debt

Stefano
Stefano
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Banks in India are considered a solution to the economy. They play a catalytic role in activating and maintaining economic growth. According to the KPGM-CII report, the Indian banking sector is expanding rapidly and has the potential to become the world’s fifth largest banking industry by 2020, and the third largest by 2025. The Indian banking system consists of 26 public sector banks, 20 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 city cooperative banks, and 93,550 rural cooperative banks. The assets of the Indian banking sector reached $1.8 trillion in the 2013-2014 period from $1.3 trillion in 2010-11, of which 70 per cent is accounted for by the public sector.


Total loans and deposits increased with a compound annual growth rate (CAGR) of 20.7 per cent and 19.7 per cent respectively between 2007 and 2014, they are still ready for growth, with the support of demand for housing and personal finance. Services provided by banks have rapidly expanded over the past decade. In addition to traditional “savings and loans”, banks began to provide a wide range of financial services such as insurance, investment, asset management and the like, which increased their economy. Information and communication technologies, including mobile phones and Internet connection, are the main reason for expanding the reach of the banking sector in young and rural settlements.


NPAs have become a serious concern for the banking sector in a few years and have greatly affected the lending of banks. According to the survey, net NPA accounts for only 2.36 per cent of total loans in the banking system.


However, if the restructured funds are considered, the accent with activated assets will amount to 10.9 per cent of total loans in the system. According to the International Monetary Fund (IMF), about 37 per cent of the total debt in India is at risk.


Economic research 2015-16 also upset policymakers about the growth of bad debts with banks and their potential to disrupt prospects for growth in the future. The banking sector recorded a slowdown in the growth of the balance sheet for the fourth consecutive year in the period 2015-16.


Profitability remained depressed by the return of funds that continued to stay below 1 per cent. Moreover, although PSBs account for 72 per cent of the total assets of the banking sector, in terms of profit, it has only 42 per cent of the total profits.


Frauds in the former Global Trust Bank (GBT) and Bank of Baroda show that a small number of officials abuse the freedom they have granted under a mortgage for personal gain. These — scams seriously damaged the image of these banks and therefore have profitable effects.


The Indian crisis in the banking sector left most government lenders an obstacle to increasing the level of bad loans, fraud scams and limited growth opportunities. In the middle of this storm, private banks will appear as winners.


Indian public financial institutions control about 70 per cent of all banking assets in the country, but have the highest exposure to poor loans in the amount of as much as $ 150 billion. In the meantime, lenders from the private sector, as reported, had a bad purchase of about Rs1.1 trillion.


Experts believe that private sector banks over the years will probably gain more market share from their state partners because they have stronger balance sheets, are less exposed to the emphasised sectors, have stronger governance and more competitiveness.


“If you look at the ten-year view, the market share of banks in the private sector currently stands at 30 per cent, it is likely to become 60 per cent,” said Sukumar Rajah, senior general manager of Franklin Templeton Emerging Markets Equity. As a result, he said, “the overall health of the banking system will improve as better banks become more of a market, and weaker banks will become a smaller part of the market.”


But the question is whether private banks in India have enough deposits to make hard bargain to meet the financing requirements of one of the fastest growing economies in the world?


In addition to telecommunications and sugar, according to the ICRA, sectors such as health, chemicals, education, mining, ferrous metals and roads were under pressure due to a more stringent business environment.


Although companies in trouble can be difficult to service their loans, a possible increase in interest rates can prolong recovery, cautioned the ICRA report. In addition, banks can become cautious due to a series of fraud and non-execution of loans, which additionally restricts growth, both for lenders and for stressful borrowers.


“It is likely that banks will now change the borrowing process to avoid another round of non-performing assets or fraud. That’s why the internal mechanism will be strengthened, “said Siddharth Purohit, SMC Institutional Equities Research Analyst.” As a result, many non-performing companies will not be able to provide further lending, which can lead to temporary increases in bad loans.


On the other hand, the report pointed out that auto-aid, petrochemicals and polymers, power (mainly renewable energy), seafood, housing finance and non-bank financial companies showed significant progress in their credit quality.


Stefano Virgilli


stefano@virgilli.com


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