Insolvency & Bankruptcy Code to help address NPA issue in banking sector

Insolvency & Bankruptcy Code is likely to play an important role in addressing the non-performing assets (NPA) of the banking sector. The banking sector is facing issues due to the bad loans on its books, which have created a risk of capital erosion. NPAs have also constrained the banks' ability to lend. Credit is an important ingredient of economic growth and the lack of credit could lead to economic contraction. It's not just public sector banks that are staring a mountain of NPAs - private sector banks are also taking a hit.

As many as 21 listed PSU banks have a combined gross NPAs of Rs 7.3 lakh crore at the end of Sep 2017 quarter. They grew by more than 27% as compared to Sep 2016 quarter. SBI has the highest share of bad loans (25.4%), followed by Punjab National Bank (7.8%) and IDBI Bank (7%). The average Gross NPA ratio - the ratio of bad loans to total advances - of PSU banks has seen a spike, from 12.04% in Sep 2016 to 14.4% in September 2017.

Although private sector NPAs do not seems to be that huge compared to public sector banks, in terms of growth they have surpassed public sector banks. As many as 17 listed private sector banks have combined gross NPA of Rs 1.06 lakh crore at the end of Sep 2017 quarter. That represents a growth in NPAs of more than 40%, compared to September 2016 quarter. ICICI Bank has the highest share of gross NPAs (41.8%), followed by Axis Bank (25.8%) & HDFC Bank (7.2%) at the end of Sep 2017 quarter. The average gross NPA ratio for private sector banks jumped from 3.6% in September 2016 to 4% in September 2017.

If NPAs are rising, so is corporate debt. Total debt (short term plus long term) of companies in the BSE500 index has gone up from Rs 25.34 lakh crore in FY16 to Rs 27.62 lakh crore in FY17, an increase of 9%.