Bad Loans and their impact on Indian Banking System
What is Bad Loan?
If the borrower is not repaying the loan amount/EMI to the lender on agreed time then lender/banks consider that as bad loans. Any loan is marked as NPA- Non Performing Assert if repayments or at least EMI are not coming from the borrower in last 90 days for commercial loans and 180 days for consumer loans like Personal and Vehicle loans.
Impact of bad loans on banks:
If bad loans are piling up this will weaken the banks revenue and they are considered as dead weight on the balance sheet of the banks.
Here is the impact of the Bad Loans:
- If the NPA percentage is increasing then there will be a scarcity of funds in the market and there will be point banks will only choose to give loans who have high valued mortgages.
- As per recent data, the bad loans in India is Rs ~ 3 lakh crores it is equal to the annual budget of Uttar Pradesh.
- Investors and Shareholders will not get their rightful returns as banks are suffering to recover loans and with struck investments, there are high chances that there will be, increase in unemployment.
- With increasing NPA rate, the trust will go down and banks will charge a higher rate of interest rates to its customers. Due to this, there will be more demand for loans and higher rates inflation as there is a higher cost of capital with interest rates.
Total bad loans of India's 38 listed commercial banks have crossed Rs 8 lakh crore at the end of June quarter. This chunk now accounts for nearly 11 percent of the total loans given by the banking industry. Over 90 percent of these sticky assets are on the books of government-owned banks. These banks constitute about 70 percent of the total banking industry, in terms of assets, meaning the government will have to bear the burden of massive capital requirements of the crisis-ridden industry.
Reasons for bad loans:
• Losses in business due to change in government or sector regulations.
• More often government will introduce and waiver off the loans for some group of people. If it is for farmers it is acceptable but for Airlines and alcohol companies it not acceptable.
• In some cases, it is due to natural disasters like floods in Chennai and Assam, droughts in southern Tamil Nadu and Andhra Pradesh, earthquakes etc.
• Due to lack of growth for some segment of business like Electronic and small scaled industries companies incur losses and become NPAs.
• Severe competition in some business categories particularly telecom and automobile sector in India.
• It is fact that in some cases bad loans are due to lending practices followed by banks are in a non-transparent way.