Banks’ Bad Loans Are Frozen, Take Data At Face Value 

There is a risk of a further increase in NPAs amid the permanent loss of GDP due to the slowdown.

Usually, in challenging times like economic growth slowdown, the non-performing asset (NPA) levels tend to move up as businesses are part of the same system. In today’s scenario, GDP growth plunged to negative 23.9% in the April-June 2020 quarter and was negative 7.5% in the July-September quarter. Remarkably, banks’ NPA levels showed improvement in this phase. This is commendable, but there is a nuance here. The Supreme Court of India in a public interest litigation (PIL) case of Gajendra Sharma versus Union Bank of India, in an interim order dated 3 September 2020, had directed that the accounts which were not declared as NPA till 31 August 2020 shall not be declared as such till further orders. That is, bank NPA levels were frozen as on 31 August 2020.

Where do we stand now? The quarterly bank results and the NPA data announced for the quarter July-September is largely in line, give and take a bit for one month, which is September when NPAs occurred but were not recognized. However, for the quarter October-December, for which results and NPA numbers would start getting declared now, fresh NPAs may not be declared.

The implication is, as and when the Supreme Court allows recognition of NPAs, there would be a spike on account of the pent-up NPAs of the intervening phase. For example, if the order is lifted by March 2021, NPA data for January-March 2021 would show a spike.

What are banks doing? They are disclosing the data, say for September, on the chunk that would have been NPA, but for the court order. Having said that, if you are not into the thick of it like an analyst or a fund manager, you would not track it closely, as it is in the fine print. The headline data on topline, bottomline and NPA, among others, declared in media conferences and summary brochures is as per the court-ordered freeze. Hence, the NPA data for October-December will show improvement as there would be some recovery or provisioning but no fresh NPA recognition.

Apart from the data freeze post August, what has led to the improvement in NPA scenario mentioned earlier? The moratorium of March to August gave relief to people and organizations in trouble, not in a position to pay equated monthly instalments (EMIs) or dues. After the moratorium ended on 31 August, we had the one-time-debt-restructuring (OTDR) scheme to be availed of by December. The IBC-NCLT (Insolvency and Bankruptcy Code-National Company Law Tribunal) process has been put on pause mode since the initial part of the pandemic. These measures supported the system and kept a lid on NPAs.

This leads to the apprehension that going forward, there may be pent-up NPAs that may surface. However, the situation is better than expected in the initial phase of the lockdown. In the first set of the Reserve Bank of India (RBI) data on moratorium, around 50% of borrowers availed of it and it seemed we are in dire straits. In the second set of data, it came down to around 40%. On the OTDR, industry estimates suggested that approximately 5-8% of loans may be in for it, led by sectors hit hard by the pandemic such as tourism, hotel, real estate and diamonds, among others.

Recent estimates point to a better scenario. A Crisil press release dated 17 November 2020 states that a preliminary analysis of 3,523 non-MSME companies indicate as many as 99% of companies (excluding MSMEs) rated by Crisil are unlikely to opt for the Reserve Bank of India’s OTDR. This is despite two-thirds of the Crisil-rated entities being eligible based on the parameters proposed by the K.V. Kamath Committee set up by the Reserve Bank of India (RBI).


As in investor, you need not worry about the nitty-gritty of everything. You need to be aware of the rationale of why you are investing into a financial asset, the risk-return profile and the requisite horizon. There are certain aspects which you need to be aware of, so that you are not taken by surprise. The bank NPA freeze is one such aspect. Otherwise, the health of the banking sector is better than earlier, after the “clean-up” drive, which is proper disclosure of NPAs, starting from 2015 till March 2020, and infusion of capital in certain public sector banks.

There is a risk of further NPAs from the permanent loss of GDP due to the slowdown, the extent of which only time will tell. There would be a long-term loss of GDP due to the pandemic, which will not be so obvious as the growth rate of FY22 will be high on a low base of FY21.


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