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Indian Banks to face ₹20 trillion NPA

Indian Banks to face ₹20 trillion NPA

Indian Banks to face ₹20 trillion NPA

Indian Banks to face ₹20 trillion NPA 


After the COVID-19 pandemic began spreading in India, the government had no option but to go for nationwide lockdown. The lockdown shut down the every establishment except those which are necessary for daily needs. The lockdown of Industries had affected their revenue generation which left them with no income to pay off their debt obligation such as salary, Electricity bill, loan repayment etc.

Considering the precarious dilemma faced by the corporate and retails segment, RBI had announced the moratorium on loans initially till May 2020 which was later extended till August 2020.

The moratorium period is soon going to end. But the revival of economy is not visible in the near future unless the demand does not picked up which is already stalled to all time low.

The one of the major negative impact of the COVID-19 crisis will be on the higher NPAs in the Banking Industry in the coming quarters. At a recent conclave Mr Shaktikant Das, Governor of RBI has said the economic impact of the COVID-19 crisis will lead to increased NPA of the Banking Industry which in turn will erode the capital of the Bank due to higher provisioning. Thus the recapitalisation of the Banking is a must do task in the coming days.

A very conservative estimates speaks that if the loan default which are under moratorium ranges from 5% to 20%, the total magnitude of NPA in the Banking Industry will be approximately between 12 trillion to 20 trillion. Imagine if the default is in the range of 50%.

It is needless to mention here that opting for moratorium has its own cost. The interest accrued on the loan under moratorium will be capitalised on the principal amount. Thus the borrower has to pay a higher amount after the end of the moratorium. Without any sign of hope of revival of the economy, the chances of default of the loan are very high.

What is the way out?
The NPA would not pose a problem where the recovery rate is very high. But in India recovery rate is very low. Even after the Insolvency and Bankruptcy Code, the recovery rate has fallen over the past few years. Given this situation, the following is the option RBI may focus on:
  1. Issue of Bonds: Earlier the Government used to issue bonds which are brought by the Public Sector Banks. The money received from the issue of the bonds is used by the government to invest in the PSBs in order to give them the necessary capital to run.
  2. Dilute the stake in PSBs: The Government must dilute their stake in the PSBs to help them raise capital from the market itself.  However considering the past year performance of the PSBs in the market, raising money from the market would not be easy unless government does not come out in support.
  3. Innovative Restructuring Scheme: Earlier too RBI came out with restructuring scheme wherein either the loan tenure is increased or the interest rate is reduced. In some cases fresh loan were sanctioned to pay off the bad debt. With the help of this the Banks postponed the bad debt recognition. This time too RBI must come out with likewise scheme until the economy gains its pre pandemic pace.


In the end, the permanent solution to above is the revival of the economy. The government had announced the 20 Lac crore package to ward off the pandemic and revive the economy. The pandemic has not ended up till now without any sign of hope in coming months. And the revival of the economy will take its own time. Therefore some concerted and unconventional steps need to be taken before time to successfully avoid the NPA crisis looming in front of the Economy.

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