RBI's formula of bad loans might miss 'the solution'

RBI's formula of bad loans might miss 'the solution'
India's banking sector regulator has said that rising bad loans have not yet raised any immediate concerns for the economy.

It is true, but partially. Because even if the banks have managed to somehow reduce their gross NPAs slightly during the December quarter, they have already restructured most of the loans.

Thus if both the scenarios are compared and totaled, the net output shows that probability of a loan going bad has increased and the situation has worsened.

As per a leading research firm, Indian banks restructured loans amounting to Rs 211 billion during the December 2011 quarter, as compared to Rs 33 billion restructuring done averagely during the past eight quarters.

However it is not all. Because this fiscal, around sixty corporate cases have been referred to debt restructuring cell that calculates up to Rs 450 billion, while the previous fiscal saw 49 such accounts that went to the cell and amounted to Rs 230 billion.

So it would be pre-mature to say as to when Indian banking sector would start recovering from bad loans and provisions, but it is certainly not this year.

However, RBI too needs to chalk out a mechanism for turning the bad loans into good, especially in sectors like aviation and power. In the context, Union Bank in its quarterly earnings announcement said that restructuring in loans is expected to rise even further during next two quarters.

Besides, the story of Air India and Kingfisher is well known and don't need any introduction again.

Dion Global Solutions Ltd

Read more about: rbi, banks, npa
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