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Banking sector (NPA (Trace back (Issues flagged by Rajan (Banks and…
Banking sector
NPA
Reason for NPAs
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Bankers, promoters and circumstances
created NPAs and banks were not recognising bad loans, not making
adequate provisions for long time
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In news
Note on bank NPAs was prepared by
Dr. Raghuram Rajan at the behest ofDr. Murli Manohar Joshi, Chairman of
the Parliament Estimates Committee.
Risks flagged by Rajan
next crisis in waiting is the loans given to
unorganized micro and small enterprises called Mudra loans and the credit extended
through the Kisan Credit Cards.
As per the Mudra website, a total of Rs. 6.37
lakh Cr has already been disbursed
Both the Mudra loans and Kisan Credit Card
have to be examined more closely for potential credit risk. It also flagged Credit
Guarantee Scheme for MSMEs run by SIDBI calling it a growing contingent liability.
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Trace back
Development financial Institutions used to lend earlier to 1991 reforms. Banks were designated Universal Banks.
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During 2006-08, due to rampant lending, the debt to equity ratio of banks reached 10
Companies not making use of borrowed money in productive manner, diverted to more profitable real estate sectors
Then came in the Global Recession followed by govt non cooperation- delay for approvals, forest clearance
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To cover up for these losses, Banks restructured the loans
-Ever green loans were granted to them, which led to piling up of more loans
It was during this time in 2014 that Raghuram rajan entered with Asset Quality Review to correct things
Issues flagged by Rajan
Banks and promoters have to strike
deals outside of bankruptcy or ifpromoters prove uncooperative,
bankers should have the ability toproceed without them.
The slowdown in credit is attributed
to over-burdened public sectorbank balance sheets and growing
risk aversion in public sector bankers.
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He defended AQR because banks were simply not recognising the bad loans and they were postponing the problem