The biggest public sector bank in India is undoubtedly the State Bank of India, it towers over all other public sector banks in terms of market capitalization. The general perception among people is that if the state has controlling ownership in a bank, it is safer to invest in. In the past decade, the NPAs of the State Bank of India have been very concerning. Non-performing assets (NPA) refer to loans that have become bad debt. It means that the bank has not and, in most likelihood, cannot recover the amount lent. The amount of NPAs bank records are usually an indicator of the health of the bank, or how well it is performing. It is not wrong to say that these NPAs will impact not only the functioning of the particular bank but also the financial system at large and in turn the economy. NPAs negatively affect the profitability, liquidity, and solvency of the banks.
Essentially, NPAs put downward pressure onto financial institutions which in turn puts pressure on the economy at large. In a bank, as the proportion of NPAs rise, it is natural to see that the investors in the bank, the depositors, and other stockholders lose confidence. This can lead to an impact on the rotation of money as well. As the money lent out does not come back into the system, the cash in hand for the bank is lower and this causes a fall in the lending capacity leading to a loss in the flow of money. Not only this but when a bank is seeing a rising trend in NPAs, it becomes imperative to make provisions for NPAs. Money used to provide for bad debts, cannot be lent, and hence, the profitability of the bank is affected. In terms of liability management as well, NPAs make it difficult for banks.
SBI has been in the top 100 banks in the world and is deemed to be as safe as a bank can get. Although the amount of NPAs act as a hindrance and contribute to the profitability of the firm, the bank had to write off over Rs. 14,000 crores in the form of NPAs, majorly to Essar steel. In the same year, the Reserve Bank of India also found a huge divergence of about Rs. 12,000 crore in the actual NPAs and the reported ones. This created a shock in the share market as well for SBI. The prizes, after the bank disclosed the divergence from the true value fell to about Rs. 245 per share from Rs. 310.
Many analysts and experts argue that this might also have been due to the well-documented scams of Nirav Modi and Kanishk Gold which came into light during the same period that the stock prices of all major PSUs went down. The amount of NPAs bank records in a year, through the complex linkages between the financial system and the economy, impact almost all the stakeholders including depositors and investors of the bank. The risks associated with NPAs through being mitigated with the provisions made by the banks, still pose a threat. When not checked properly, NPAs can drive banks into bankruptcy and that can cause an economic crisis, the way it happened in the 1930s in the USA. Better lending practices, taking into consideration the ratings of agencies like CIBIL, and having efficient recovery tribunals might do more good to the banks and the economy than meets the eye.
Author: Lavanya Desiraju
A senior at SRCC, pursuing a Bachelor's in Economics. Interested in statistics, data analysis, and a connoisseur of coffee and classical music.