Mixed signals

The Reserve Bank of India, in its second financial stability report, has projected an increase in the Non-Performing Assets (NPAs) of banks. The central bank believes that the Omicron variant of the corona virus could have a negative impact on the economy. Rising inflation is also one of the reasons behind the mounting NPA. As per the Financial Stability Report, the NPA of banks may increase from 8.1 per cent to 9.5 per cent by September 2022, which was 6.9 per cent in September 2021.

However, according to Shaktikanta Das, Governor of the RBI, the financial position of the banks is good as of now. Banks have performed well during the pandemic due to expedient policies of the government and the policy support from the RBI. The financial market also remained stable over the period. Therefore, the RBI is confident that the banks will easily deal with the NPA. Earlier, in its first Financial Stability Report, the Reserve Bank of India had said that by March 2022, the GNPA of banks could be 9.8 per cent and if the situation worsens then it can reach the level of 11.22 per cent.

By March 2021, the NPA of scheduled commercial banks had come down by Rs 61,180 crore to Rs 8.34 lakh crore, as against Rs 8.96 lakh crore in March 2020. In March 2021, the Gross NPA (GNPA) of banks was 7.5 per cent of total advances, while the net NPA was 2.4 per cent. This shows that the banks performed well during the pandemic.

The GNPA of listed banks stood at Rs 8.11 lakh crore in June 2021 as compared to Rs.8.32 lakh crore in June 2020. Public sector banks performed better than private banks on this parameter. Their GNPA declined by 4.2 per cent while that of private sector banks rose by 3.3 per cent. The net NPA of public sector banks declined by four per cent during this period, while the net NPA of private sector banks grew at the rate of 22 per cent.

Almost all public sector banks have performed well in the first quarter of the current financial year as well. During this period, the collective net profit of listed banks grew by 61 per cent year-on-year basis, while the net profit of public sector banks grew by 140 per cent year-on-year to Rs 14,012 crore from Rs 5,847 crore.

At the same time, the net profit of private sector banks increased by 28 per cent to Rs 18,083 crore from Rs 14,127 crore. In the area of operating profit also, the performance of public sector banks has been better. Their operating profit grew by six per cent, nearly double to that of private banks. In the June quarter, fee income of public sector banks grew by 35 per cent, while that of private sector banks by 20.5 per cent.

As noted in the preface of the Financial Stability Report, the Indian economy was devastated due to the second wave of the pandemic, but now the recovery of the economy is clearly visible. However, it is believed that the Omicron variant of Coronavirus can again damage the Indian economy badly, as its transmissibility is very high.

Even though the percentage of death from Omicron variant is low, its unprecedented ability to spread ensures that it can prove to be more dangerous than the delta variant.

According to the Financial Stability Report, private investment has still not reached the pre-Covid levels, which means that the income of the common people has also not recovered fully and they are spending less. Rising inflation is making a dent in the pockets of the common people. People are not able to spend due to low income and inflation. To overcome this to some extent, there is a need to coordinate between the demand and supply side, but relevant action on this front remains elusive. Mismanagement is also one of the potent reasons for mounting inflation.

Due to higher imports than exports, the current account deficit (CAD) in the second quarter of the current financial year stood at USD 9.3 billion, which is 1.3 per cent of the gross domestic product (GDP), whereas current account deficit in the first quarter of the current financial year stood at USD 6.6 billion, which was 0.9 per cent of GDP. According to the Reserve Bank of India, the widening of the current account deficit in the second quarter of the financial year 2021-22 is due to the widening of the trade deficit to USD 44.4 billion, from USD 30.7 billion in the previous quarter. The current account deficit is likely to be above USD 25 billion in the third quarter of FY 2021-22, while the current account deficit in the financial year 2021-22 is likely to be 40 to 45 billion dollars or 1.4 per cent of the GDP.

The increase in trade deficit and current account deficit is increasing the pressure on the economy. Consequently, the government is not able to spend the required amount on various important items, due to which demand is not increasing. Since the increase in demand accelerates economic activity, therefore, the pace of recovery in the economy is slow. Owing to the increasing pressure on the economy, there will be a decrease in the income of the businessmen and the common man, making people unable to pay installments and interest on their loan. This may ultimately culminate in an increase in NPA levels.

It is true that the laws or the institutions engaged in the recovery of NPA have not been able to give the expected results, but it is also true that recovery of NPA has already accelerated. In the last six years, banks have been successful in recovering more than Rs five lakh crore of NPAs and can be expected to give better results on this front in the coming days as well.

The possibility of increase in the NPA, as stated under the Financial Stability Report by the Reserve Bank of India can be justified, because at present, the Omicron cases are surging rapidly in every part of the country and inflation is also increasing. On the other hand, there has been a significant improvement in the performance of banks recently. Some big banks have also been successful in raising capital from the market. In such a situation, it can be said that even though there is a possibility of an increase in the NPA of the banks, there will be no negative impact on the banks as they will tackle the situation easily.

Views expressed are personal