Banks will need to take a “haircut” of up to 60 per cent on their bad loans to resolve the issue of massive non-performing assets (NPAS) accumulated in the Indian banking system, which is holding up higher economic growth, rating agency Crisil said on Wednesday.
According to the American agency S&P-owned Crisil, tepid investment growth and the high level of NPAs are the two uncertain factors clouding the outlook on India achieving a Gross Domestic Product growth rate of over 7 per cent in the next fiscal.
“Banks will need to take a haircut of up to 60 per cent to resolve the issue of NPA,” Crisil Chief Analytical Officer Pavan Aggarwal said at an editors meet organised here by the company.
“The top 50 NPA accounts constitute 50 per cent of all bad loans of banks in the country and account for Rs 4,25,000 crore of NPAs,” he said.
“The critical element for the economy now is a speedy resolution of these cases which will bring down the level of gross NPAs,” he added.
Pointing out that the credit growth of banks would improve on a resolution of the NPAs issue, the Crisil analyst said that their capacity to take haircuts had been bolstered by the massive recapitalisation recently announced by the government for state-run banks.
The government has embarked on a two-pronged strategy in this regard, he said.
On the one hand, the government has brought in the Insolvency and Bankruptcy Code which provides for a time-bound insolvency resolution process. The Reserve Bank of India has already identified 12 accounts adding up to 25 per cent of the NPAs for insolvency proceedings. Another 29 companies also identified by the Reserve Bank of India are set to head to the bankruptcy court.
On the other hand, the Union Cabinet, in October, approved a Rs 2.11 lakh crore recapitalisation plan for state-run banks. Of this, Rs 1.35 lakh crore will be raised through recapitalisation bonds and the remaining through budgetary support and market borrowings.
The accumulated NPAs in the Indian banking system have crossed a staggering Rs 8 lakh crore.