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Jun 30, 2018, 17:14
Bad loans to rise further. RBI expects so

The fiscal year 2018 have been troublesome for the Indian Banks and most importantly for the Public Sector Unit Banks (PSUs) since almost 85% of the frauds in the banking sector occurred in the government sector and a total of 6,500 frauds were reported amounting to more than Rs.30,000 Crore.


Currently, there are a total of 19 banks which are nationalized and out of them 11 of the banks are currently under the Prompt Corrective Action (PCA) framework. The framework was introduced to provide a corrective measure to improve the gross NPA of the banks which are having stressed assets.


In a recent report from the RBI, A sombre picture about the banks was painted about the future of the banking sector in India. RBI stated that the Gross NPA ratio of the banks is likely to rise from the current 11.6% recorded in March 2018 to new high of 12.2% by the end of the FY19.


The statement posted on the Financial Stability Report (FSR), wherein the regulator of banks confirmed that the gross NPA ratio of the banking sector is continually growing.


It pointed out that the banks are already having weak profitability and therefore won’t be having enough fund to keep aside for potential loses or moreover the provision for doubtful debts which would make them vulnerable to adverse shocks.


The rising bad loans would simply add into the already worsened situation by creating further erosion to capital buffers. Below is the data posted by RBI which clearly shows that Public Sector Banks (PSU) account for almost 88 percent of the total loan frauds.


Source: RBI, RTI report of frauds involving amount more than or equal to Rs.1 Lakh (Amount in Rs. Lakhs)


Also referring to the 11 PSU banks which are under the PCA framework, their situation is likely to worsen and their GNPA ratio may also increase from the current 21% in ending FY18 to 22.3% by the end of FY19 and also are likely to face capital shortfall which is relative to the minimum Capital to Risky Asset Ratio (CRAR) of 9% which would lead to infusing of more capital and therefore PSUs would governments aid in the situation.


The report further also stated that not only the PSU banks are affected but also the profitability of commercial banks is declining since there is an increase in the provisioning done by them.


The 11 PSU Banks which are under the PCA framework are as followed along with the NPA%:



Effect of rise in NPA on the Indian Economy:


Due to the rise in the NPAs, the bank's revenue will tend to decline and make the PSU banks weaker. Since the rise in NPA in the PSU banks is mainly due to the mismanagement of the loan distribution carried out and this will indeed lead to scarcity of funds in the Indian market and therefore few banks would try lending even if they are not sure of the recovery of money. The shareholders will lose their money and would create a financial crisis situation in the market. The price of the loans, interest rates will hike which will directly impact the investors who wish to take loans for various projects. There would be a higher cost of capital due to inflation since it would be indirectly affecting the retail consumer owing to lower growth and higher inflation. Therefore proper action against the situation needs to be taken care in order to reduce the NPA in the banks.


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