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To address rising NPAS, consider divesting government holdings in state-owned banks, including by strategic sales

THE SURGE IN gross non performing assets (NPAS) or bad loans of state-owned banks by 56.4 per cent to Rs 6,14,872 crore for the 12-month period ended December 2016 should come as no surprise. The continued slowdown and slump in demand in many sectors has added to the trouble for borrowing companies and their ability to service their debt. But what’s worse, going by a report in this newspaper based on data on bad loans compiled by credit rating agency ICRA, the ratio of such bad loans is set to rise over the next two quarters as many firms, especially small and medium scale units, struggle to cope with the impact of the ban on high value notes announced by the government on November 8. The ICRA data shows that bad loans now constitute 11 per cent of gross advances of state-owned banks.

The fact that at least five government-run banks have gross NPA ratios or the ratio of bad loans to total loans of over 15 per cent, and that one bank alone, the Indian Overseas Bank, has a gross NPA ratio of 22.42 per cent, reflects the state of their balance sheets and their inability to recover a large chunk of loans, especially from business groups which were executing infrastructure projects. Today companies don’t seem keen to set up greenfield projects or to buy out already created assets on the ground by promoters who had taken on huge loans to finance them. The lack of a market for distressed assets and a reduced focus on recovery of bad loans over the last couple of months in the aftermath of the ban on high-value notes will make NPA reduction more difficult.

For now, the government appears to calculate that growth will address some of the problems. But the time for incrementalism is over. The time may have come to go beyond half measures and to look at divesting the government’s holdings in state-owned banks, barring a handful such as the SBI, to below 51 per cent, including through strategic sales. This is a reform which cannot brook any delay. Proposals now on the table, such as creating a Public Asset Rehabilitation Agency, will not provide a durable solution. No one disputes the fact that the best antidote to this crisis is growth but surely that doesn’t mean that the government — the owner of these banks which have a dominant share — should not move fast to carry out enabling measures in the interim to help these lenders to equip themselves better in terms of operational efficiency besides improving governance standards. The longer the delay in addressing this crisis, the greater will be the challenge — not just in terms of ensuring a well functioning banking system which supports the needs of businesses and individuals but also on the front of financial stability.