The other factors that contributed to the deterioration in asset quality, according to the central bank analysis, were project delays and cost overruns; and absence of a strong bankruptcy regime until May 2016.
Lax credit appraisals, and weak post sanction monitoring systems in the years when credit was booming led to the pile of bad debt in the banking system, according to a report by Reserve Bank of India (RBI).
"The deterioration in asset quality of Indian banks, especially public sector banks (PSBs), can be traced to the credit boom of 2006-2011 when bank lending grew at an average rate of over 20%. Sector-wise, industrial sector receives 37.3 % of total loans and advances, but it contributes about three-fourth of total NPAs," RBI said in its 'Report on Trend and Progress of Banking in India 2017-18' released last week.
The other factors that contributed to the deterioration in asset quality, according to the central bank analysis, were project delays and cost overruns; and absence of a strong bankruptcy regime until May 2016.
A senior banker said, "Cancellation of the coal blocks, variation in prices of imported coal, inability to implement power purchase agreements have all led to the huge pile-up of NPAs. For many promoters, there were external factors beyond their control."
The gems and jewellery sector faced a significant increase in gross non-performing assets (GNPAs) during 2017-18 with the unearthing of frauds like the Geetanjali Gems and the Nirav Modi group of companies.
"Recovery of stressed assets improved during 2017-18 through the Insolvency and Bankruptcy Code, 2016 and apart from vigorous efforts by banks for speedier recovery, amending the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (Sarfaesi) Act, 2002, to bring in a provision of three months' imprisonment in case the borrower does not provide asset details and for the lender to get possession of mortgaged property within 30 days, may have contributed to better recovery," the report said.
During 2017-18, the GNPA ratio reached 14.6% of advances for PSBs due to restructured advances slipping into NPAs and better NPA recognition. For private sector banks (PVBs), it remained at a much lower level but rose during the year. "Supervisory data suggest that during H1 of 2018- 19, the resolution of some large NPA accounts resulted in an improvement in asset quality of SCBs," the report said.
Bhushan Steel, which was taken over by Tata Steel, Electrosteel Steels taken over by the Vedanta group and Binani Cement taken over by the Aditya Birla group are some of the large accounts from which banks could report substantial recoveries.
Debt wavers led to an uptick NPAs from the agricultural sector. In contrast, the cement sector benefitted from a significant decline in the GNPA ratio, with the resolution of some stressed accounts and an uptick in financial performance. The basic metals and metal products sector remained highly leveraged, although the proportion of bad loans declined in the first half of 2018-19 due to resolution of large NPA accounts in the steel sector. Other industries with high levels of stress were engineering, vehicles, construction and textiles. In all major industries, except for petroleum and coal products, the GNPA ratio of PSBs remained higher than that of PVBs, the report said.
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