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Economic downturn one of the reason for rise in NPA of PSBs: RBI Governor

02 May 2016 Evaluate

Reserve Bank of India (RBI) Governor Raghuram Rajan replying to the Public Accounts Committee (PAC) of Parliament questionnaire on non-performing assets (NPAs) of public sector banks (PSBs), has put the blame on "economic downturn", among other reasons, in his submission to the panel. In his reply, Rajan said, 'While some of the reasons for recent spurt in NPAs could be subset of those indicated by Narasimham Committee, the level of stressed assets are seen in the context of overall economic downturn'. The RBI governor recalled that NPA ratio had steadily declined from 15.7 per cent in 1996-97 to 2.36 per cent in 2010-11, but the asset quality of the Indian banking system again come under stress in the last couple of years, as a consequence of global as well as domestic economic slowdown.

Rajan listed six primary reasons for spurt in stressed assets that have been observed in recent times. These included domestic and global economic slowdown, delays in statutory and other approvals especially for projects under implementation and aggressive lending practices during upturn as evidenced from high corporate leverage. Other reasons cited by Rajan were laxity in credit risk appraisal and loan monitoring in banks and lack of appraising skills for projects that need specialised skills resulting in acceptance of inflated cost and aggressive projections. Besides, he also listed wilful default, loan frauds and corruption in some cases among the key reasons. Rajan also noted that banks tend to attribute most of the non-performance issues to business/commercial risks of the borrowers, whereas the borrowers attribute such situations to macro-economic factors for banks for not providing timely finance/enhancements etc.

The PAC headed by Congress MP K V Thomas had suo motu taken up the issue of NPAs of public sector banks, which touched Rs 3.61 lakh crore at the end of December 2015. The PAC Chairman also sought to know the 'real causes for the present spurt in NPAs and stressed assets' and whether these are really different from those listed by the Narsimham Committee that went into the NPA issue in 1998. PSBs had first refused to appear before PAC, but agreed later and made their submission.

In its questionnaire for the RBI Governor, the panel observed that Private Sector Banks and Foreign Banks do not have as much NPAs as the Public Sector Banks. This was despite the constraints under which the entire banking sector operates being the same, except for the Priority Sector Lending (PSL) requirements. Various public sector banks may also be asked to appear before the panel again to explain their position.

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Economic downturn one of the reason for rise in NPA of PSBs: RBI Governor

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