Mutual funds are advertised with the rider that they are subject to market

risks, but what about fixed deposits? While caution is thrown to the wind
when talking mutual funds or the stock market, banks are considered to be a
safer destination for parking one’s wealth.
Fiduciary trust, the underlying basis on which finance works, grants that
money deposited in a bank is shielded from the vagaries of the market. The
principal can be withdrawn, along with the interest accumulated over time.
However, that could be about to change given the passing of the Financial
Resolution and Deposit Insurance (FRDI) Bill, which is pending before a
Standing Committee of Parliament.
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The government has proposed this legislation for the recapitalisation of

banks. Despite being awarded a positive outlook by the credit rating agency
Moody’s Investors Service, India’ financial institutions are in need of
resuscitation given the pile-up of non-performing assets (NPAs) that
threaten to hinder growth, and jeopardise the health of both state-owned, as
well as private banks. As it stands, stressed assets held by Indian banks
amount to around Rs.10 lakh crore ($150 million), roughly twice the GDP of
Sri Lanka.

What are NPAs?

The primary function of the Reserve Bank of India (RBI) is to regulate the
supply of money in the economy. For this end, they use tools like the Cash
Reserve Ratio (CRR), the Statutory Liquidity Ratio (SLR), the repo rate, and
the reverse repo rate. Bad loans arise when banks make poor lending
decisions. The CRR is calculated as a percentage of the net demand and time
liabilities (NDTL).
CRR is the money that banks are required to deposit with the RBI, for
which they will not be paid interest. At present, the RBI has fixed this at
4%. In addition to this, banks have to deposit a portion of their money in
relatively safe assets which are easily saleable - such as government
bonds, securities or gold - to generate liquid cash in the event of a run on
the bank. The current SLR is 19.5%.
For example, out of every Rs.100 deposited in a bank, Rs.4 is parked with the
RBI, and Rs.19.5 in assets like bonds or gold. Almost a quarter of the money
in the system can be retrieved in case of a contingency while the bank is free
to lend the remaining Rs.76.5 to corporate or retail borrowers. The interest
gleaned on such loans is used to compensate the bank’s customers as interest
payment, and the remainder is the bank’s profit. NPAs arise when banks lend
to clients who default on their repayment.

How do Indian banks compare with their global counterparts?

The Financial Stability Report, 2017, released by the RBI, states that
India’s gross NPAs stands at 9.6%. This figure is the sum total of all
stressed assets held by lending institutions in the country including co-
operatives and small banks in addition to government and private banks. India
has the second highest ratio of NPAs among the major economies of the
world. Only Italy, with 16.4% NPAs has more stressed assets. China, whose
economic growth is largely fuelled by borrowings, has only 1.7% NPAs
according to the International Monetary Fund (IMF) Soundness Indicators.
However, despite the large quantum of stressed assets, India’s NPA problem
is not comparable with debt-ridden countries like Greece and Ukraine
which have 36.3% and 30.5% NPAs.

Which industries are the major defaulters?

The RBI’s Financial Stability Report names the basic metals and cement
industries as the most indebted, with 45.8% and 34.6% stressed assets
respectively. Despite the recent GDP numbers which point to lukewarm
growth, the metals industry continues to be hamstrung by slow demand and
cheaper imports. The construction, infrastructure and automobile industries
also account for a sizeable chunk of banks’ NPAs.

Which banks have the most NPAs?

According to the response given by the Finance Minister Arun Jaitley to

a question raised in the Lok Sabha on August 11, 2017, the gross NPAs of
public sector banks increased by 311.22% from Rs.1,55,890 crores in 2013 to
Rs.6,41,057 crores in 2017. The gross NPA ratio as a percentage of total
assets rose from 3.84% to 12.47%. Likewise, the gross NPAs of private banks
witness an increase of 269.47% from Rs.19,986 crores in 2013 to Rs.73,842
crores in 2017.

These numbers present a slight variance with that estimated by credit rating
agencies since the methodology adopted by banks for classifying their assets
vary. According to the rating agency CARE, as of June 2017, State Bank of
India leads the list of scheduled banks with the highest NPAs with
Rs.1,88,068 crores of stressed assets. Punjab National Bank and IDBI Bank
follow suit with Rs.57,721 crores and Rs.50,173 crores of gross NPAs
respectively.

However, among Indian banks, IDBI Bank, which has 24.11% gross NPAs
tops the list for lending institutions with the highest exposure to liabilities.
Indian Overseas Bank has 23.6% NPAs while fellow private lenders like
Kotak Mahindra Bank and HDFC fare better with only 2.58% and 1.24%
gross NPAs. State Bank of India, which is saddled with most stressed assets
in absolute terms, has a gross NPA ratio of 9.97%.

It should also be noted that India’s bad loans problem could hold economic
growth to ransom. Data collected by the Ministry of Statistics and Programme
Implementation (MOSPI) and compiled by the World Bank reveals
that economic growth tapers off with a spike in the bad loan ratio. While
 economic output has been laggard over the past few quarters owing to
disruptive policies such as demonetisation and the implementation of the
goods and services tax (GST), the lacklustre performance of India Inc has
pulled down banks with greater defaults from corporate clients. The gross
NPA ratio has spiked from 5.884% in 2015 to 9.6% in 2017 while economic
growth has slumped in the corresponding period.

How has the government reacted to the NPA crisis?

The Financial Resolution and Deposit Insurance (FRDI) Bill is the latest
attempt at mopping up the bad loans with which banks are saddled with.
Previous attempts to this end have been moderately successful. To recover
outstanding loans, a slew of legislations including the IBC (Insolvency and
Bankruptcy Code), the SARFAESI (Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest) Act, and the RDDBFI
(Recovery of Debts due to Banks and Financial Institutions) were instituted.
Debt Recovery Tribunals (DBT) were also set up to fast-track proceedings.
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The SARFAESI Act empowers banks to auction assets or properties that were
submitted as collateral while sanctioning loans. Under this Act, 64,519
properties were seized in 2015-16. However, the value of recovered assets
constitutes only a tip of the NPA iceberg.

What is the Financial Resolution and Deposit Insurance (FRDI)

Bill?
The FRDI Bill is aimed at insuring the money of a bank’s depositors in the
case of an eventuality where the bank would have to be liquidated. However,
some of the provisions of the draft have drawn the ire of depositors and bank
 employees alike, since it compromises the interests of the depositor and gives
the government absolute power in deciding the fate of banks if they go under.
The bill proposes the setting up of a Resolution Corporation, “whose direction
and management vests with the Board, subject to the terms and conditions of
the Act.” A ‘Corporation Insurance Fund’ is the financial vehicle which will
be used to garner insurance inflows.
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While debt restructuring and ensuring the robustness of financial institutions

was previously the domain of the RBI, the bill gives the government
overweening powers by virtue of greater representation in the Resolution
Corporation. The Board consists of a Chairperson, one member each from the
Finance Ministry, the RBI, Securities and Exchange Board of India (SEBI),
the Insurance Regulatory and Development Authority of India (IRDAI), the
Pension Fund Regulatory and Development Authority (PFDA), three full-
time members and two independent members, both of whom will be
appointed by the Central government. This implies that six of the 11 members
of the Board will be nominated by the government, giving it the final say in
decision making.
North Block’s turf war with the RBI is just one among the highlights of the
proposed legislation. The bail-in clause has emerged as the major bone of
contention with depositors. This gives banks the authority to issue securities
in lieu of the money deposited. While the insurance covers only Rs.1,00,000
of the principal, the remainder of the sum deposited with a bank will be
converted to tradable financial assets which can be redeemed. However, their
value will not be immediately commensurate with the deposit amount since if
a bank has filed for bankruptcy, the value of assets held would have also
eroded.
Other countries that have experimented with a bail-in clause have not fared
well. In Cyprus, depositors lost almost 50% of their savings when a “bail-in”
was implemented by the resolution corporation, Thomas D. Franco, general
secretary of the bank employees association AIBOC told Frontline.
The FRDI Bill which is currently pending before a Standing Committee of
Parliament is likely to be introduced during the winter session which begins
on December 15, 2017.