80% of the bad loans of the public sector banks in India are to the corporates.

As on March 31, 2017, the accumulated bad loans of public sector banks stood at Rs 6,41,057 crore. More than 80% of these bad loans had accumulated due to defaults by corporates who had taken on loans given to the industry and the services sector.

Whenever a borrower defaults, the money given as a loan does not come back to the bank. Hence, in order to continue its operations (i.e. keep lending) the bank needs fresh money. Where does this money come from? This money comes from the government, the owners of these banks.

Between April 1, 2007 and March 31, 2018, the government would have ended up investing Rs 2,29,329 crore. As the owner of these banks, the government had to invest this money to keep these banks going. This money could have easily gone towards other important areas like education, health, defence and agriculture, which would have benefitted the ordinary citizens of this country. This basically means that ordinary citizens have lost out in the process.

Further, banks need to write off bad loans which cannot be collected. Between April 1, 2012 and September 30, 2017, the public sector banks have written off loans worth Rs 3,03,551 crore. Hence, the profits of the banks have gone down to that extent and hence the government’s earnings.

To boost its earning, government will have to apply more taxes , which means that people have lesser money to spend on other things. It could also lead to lower savings, if people chose to maintain their expenditure. This has an impact on the whole business cycle which is not very easy to quantify, but citizens of India are paying for it.

IBC ( Insolvency and Bankruptcy Code) — A ray of hope.

But there is a ray of hope now. The government and the Reserve Bank of India (RBI) have finally decoded the banking sector’s non-performing asset (NPA) problem.

Yes, it has taken a long time. But things have now started to turn around.

IBC is going to be a big game changer for India’s banking sector. It gave banks the power they needed.

Earlier, banks had to run after promoters to recover their money. Now promoters are running after banks and looking for solutions.

As per the RBI’s financial stability report, more than 4,300 applications were filed in the National Company Law Tribunal (NCLT).

With this, banks have sent out a clear message – pay up…or be ready for bankruptcy proceedings.

A few days back, we had a first taste of success after the banks successfully recovered Rs 352 billion following the successful resolution of Bhushan Steel.

Clearly the IBC is the biggest reform for the banking sector in a long time.

More importantly, lending in the next credit cycle will be more disciplined as a result.

Cases once admitted are to be resolved within 270 days; if not, companies go into liquidation.

Enthused by this success, the finance ministry expects banks to write back more than Rs 1 trillion after the resolution of all 12 big NPA cases that have been referred for insolvency proceedings by the RBI.

We believe, this can be a big boon for the banking sector and the Indian economy. This will not only help banks recover bad loans to an extent but also help bring back credit growth.

Japan is ranked number one in the world in resolving bankruptcies? As per a World Bank study, Japanese banks recover around 92% of the outstanding amount on defaulting loans. And that too, within just 6 months of the bankruptcy proceedings!

Compared to this, India’s rank is 103. It takes around 4.3 years to resolve bankruptcies in India. The recovery rate, at just around 26%, is one of the lowest in the world.

But that was in the past. Things are about to change for the better for sure.