The bank bad loans rate was 7.5% as of March 2021, down from 8.4% as of March 2020. As for public sector banks, the bad loans rate was 9.5% versus 10.8% a year earlier. Bad loans are loans that have not been paid for 90 days or more. The ratio of bad loans to total loans is called the bad loan rate.
In each FSR, among other things, RBI also predicts the bad loan rate under various scenarios in the near future. This time, RBI predicts that the interest rate on bad loans from banks will rise to 9.8% by March 2022 in the baseline scenario and to 11.22% in the severe stress scenario.
This is very optimistic compared to the RBI forecast in the latest FSR report released in January. In it, the central bank expected the bad loan rate to reach 13.5% under the baseline scenario and 14.8% under the high stress scenario by September 2021.
RBI revised its bad loan rate forecast downward in its latest financial statement from 13.5% in September to 9.8% in March 2022. This is in line with a recent message from the central bank, in which it tried to predict a positive outlook amid economic gloom and doom.
Take, for example, the latest report on the state of the economy, in which the central bank quoted Winston Churchill as saying: “The pessimist sees difficulty in every opportunity; An optimist sees an opportunity in every difficulty. ” However, the central bank’s task is not to be optimistic or pessimistic. His job is to name things the way he sees them.
In addition, several loan restructuring schemes launched by RBI would help eliminate problem loans in the future. Loan restructuring involves extending the maturity of the loan, thereby reducing recurring interest payments and recurring principal repayments. It could also simply include a reduction in the interest charged on the loan.
In the past, banks and bankers have also expanded and pretended to be. This is a favorite trick of bankers called permanent lending. This includes providing a new loan to the borrower to pay interest on the original loan or even repay it. And then everyone can pretend that everything is in order. This happened quite often in the period from 2011 to 2014, when overdue loans increased due to previous lending, but banks did not recognize them.
However, as former RBI governor Raghuram Rajan said in his November 2014 speech: “Ugly Shakespeare, NPA by any other name smells just as bad!”
In addition, the RBI has had terrible forecasting performance. For example, take a look at the following diagram. It displays the RBI’s forecast of the expected bad loan rate under the baseline scenario and the actual bad loan rate as it turned out.
The above diagram is a very interesting reading. From March 2014 to March 2018, when the rate on bad loans of Indian banks was rising, RBI constantly underestimated it. After that, when the overdue loans decreased, he constantly revalued them.
This cycle should unfold now, given the negative economic impact that covid has had on the country’s economy. For example, take the level of bad loans from public sector banks when it comes to lending to micro, small and medium enterprises. It was 15.9% as of March 2021, up from 13.1% as of December 2020. This is despite numerous restructuring schemes launched by RBI over the past few years.
With this in mind, past RBI forecasts for bad loan rates are not particularly credible. As a former chief economic adviser to the Ministry of Finance, Arvind Subramanian writes in his book The Advisor: “For many years RBI could not grasp the seriousness of the loan repayment problems or identify the long-term frauds of Nirava Modi … In March 2015. RBI predicted that even in the case of a “severe stress” scenario – to put it colorfully, all hell will break out, with a fall in growth and an increase in interest rates – NPA [bad loans] will reach at best about ₹4.5 trillion “By March 2018, the total amount of problem loans from banks amounted to ₹10.36 trillion
While it is impossible to predict the exact figure, the RBI is far from the truth. One of the possible reasons could be suggested in defense of RBI. Suppose that in March 2015, the central bank suspected that bad loans from banks were about ₹10 trillion Did it make sense to let out such a huge number of people as the country’s banking regulator? Such numbers could scare the country’s banking system, which RBI as the country’s banking regulator would not want.
In this scenario, it may have been wiser for the regulator to gradually raise the forecast for bad loan rates as the situation worsened, rather than forecasting it in one go. But, of course, there is no insider information on this matter, and such a logic was proposed only in order to enable the country’s banking regulator to express doubts.
The problem is that it repeats the same error over and over.
Vivek Kaul – author of Bad Money…
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