For some time now, there have been clear symptoms indicating that the ecosystem is not in order. There was a lack of trust. Despite its liquidity, the system has not been able to finance India’s growth efforts. In addition, we avoided a full report and a diagnosis and postponed the treatment of major problems. Perhaps with the best of intentions, we have not realised that the total value of our assets in the financial sector (NPA) has been ineffective for almost a decade.
Under this deliberate collective blindness, India has embarked on the path of resolving chronically taxed sectors such as real estate energy and micro, small and medium-sized enterprises (MSMEs). The country has postponed urgent and necessary banking, governance and market reforms. Finally, India is lagging behind in creating a favourable investment climate, which has hampered credit growth and job and output creation.
But every call has a chance. It is never too late to admit the truth and take action.
Reliable evaluations of potential NSAs after the end of Covid-19 could make an invaluable contribution to the development of any economic assistance and reconstruction programme. In the medium term, a credible report on the health of the financial sector can help us diagnose and address the main problems in our real economy and exploit our huge economic potential.
The bank and the BNFK
It is fair to say that OTP disclosure in the banking sector has improved significantly since RBI introduced the Asset Quality Assurance (AQA) programme in 2015. The Bank’s gross IBR to be reported increased from 4.5% of the advances in March 2015 to 11.6% of the advances in March 2018, and then decreased to 9.3% of the advances in September 2019.
However, the NPA’s recognition for the banking sector remains incomplete, even before Covid-19. For some time RBI has allowed banks to postpone NPA recognition for some of the more than ₹8 trillion MSMEs, MUDRAs and commercial real estate loans. Some reports suggest that there is considerable stress in this area and that the GNP of the actual banks already exceeds 11% of advances.
Although the situation regarding the NAP has improved considerably over time, it remains incomplete. A quick glance shows that the level of the provision for credit losses of a given bank is largely determined by the capital available for its absorption and not by an objective assessment of the amount that can be recovered by the NBB.
Around the OTP NBFC, the lack of confidence is even greater. Despite the fact that the RBI recently stepped up controls by the NBFK, unlike the banks, they were not subject to strict and formal CROs. Officially, in September 2019, NBFC’s gross NPA amounted to 6.3% of advance payments – less than those of the banks. Lack of trust is the worst nightmare of any financial ecosystem. It allows speculation and fear to take over.
The application of the banking sector’