Are large corporates jeopardizing Indian financial system?

A report by India Ratings has said that corporate loans worth nearly Rs 2 trillion (Rs 2 lakh crore) are likely to turn bad in the next 12-18 months. However, the report has added that there is a downward trend in the overall additions to the non-performing loans category of the banks. 

The fact that the Indian banking system has been beset with the problem of a huge pile-up of corporate bad debts is a matter of grave concern. The gravity of the problem is evident from the fact that at the end of September 2017, the gross NPAs of public sector banks (PSBs) amounted to Rs 7,33,974 crore, while the gross NPAs of private sector banks amounted to Rs 1,02,808 crore, taking the total GNPAs of the Indian banking system to a whopping Rs 8,36,782 crore. In fact, State Bank of India’s GNPAs of Rs 1.86 lakh crore exceeded the GNPAs of all private sector banks!

More disconcerting is the fact that leading corporate houses and companies accounted for 77 per cent of the total GNPAs from domestic operations, which means that out of the total bad debts of more than Rs 8.36 lakh crore, the bad loans attributable to the corporate sector amounted to more than Rs 6.44 lakh crore in Sept. 2017.
The GNPAs had reportedly climbed up to Rs 9.60 lakh crore by December 2017 and are further expected to go up by more than Rs 2 lakh crore in the next 12-18 months, taking the overall GNPAs to almost Rs 12 lakh crore by the middle of 2019.

By defaulting on repayment of loans, the corporate sector is putting the entire financial system in jeopardy. But the corporate sector alone is not to be blamed for the NPA mess. The management of the concerned banks must share the blame for not exercising due diligence and for poor governance standards followed by them while dishing out huge loans to these large corporates.

Commenting on the dire situation, former RBI deputy governor Subir Gokarn had compared banks’ NPAs with cancer and said that if the malady is not treated early, the patient (banks) would die. In a similar vein, RBI deputy governor Viral Acharya had warned banks that not keeping adequate capital to absorb losses due to bad debts was tantamount to a person slipping from the terrace of a skyscraper to fall and die. If that situation comes to pass, not just the banking system or Corporate India, but India itself would be the loser.