Bad Loans – How Are They Affecting the Banking Sector?

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Bad Loans

A bad loan in India is the biggest problem that our economy is facing right now. It is one of the hottest topics of conversation. According to an analysis, if the banks will recover all the bad loans, then that amount will be enough to cover the expenses of the country on education, health, defense, and transportation. The amount of bad loans of Public Sector Banks is Rs. 4 lakh crore that is more than the valuation of all PSU banks. The problem of bad loans or non-performing assets is haunting the growth of our economy. Let me take you to the core of bad loans and make you understand what is happening:

What are Bad loans?

Bad loans are loans where the debtor is not making payments. Banks will try to collect the payments and get the loans back to the current state. However, some of the loans will persist and eventually file bankruptcy. Banks will recover whatever they can from the mortgaged assets and write off the remaining amount as loss.

A person is always liable to pay back the loan if he has the means. The bank can take the debtor to court and get a favorable ruling to recover its debt from any assets the debtor has. The only protection debtor has is when they file bankruptcy i.e their debts are more than their assets. The bankruptcy laws vary from country to country and so also the protection they offer. In recent times it has become tougher for people to write off their debt in the bankruptcy and you can still be liable for the debt even after bankruptcy. Just that the banks can’t come after you as aggressively until you start making some money.

Effects of Bad Loans on Banking Sector:

  1. The non-performing assets of public sector banks are increasing sharply as compared to private sector banks. At present, the banks have Rs. 4 lakh crore bad loans.
  2. Public sector banks are contributing more in bad loans as compared to private sector banks. According to RBI data, the private sector banks are at 6% of their outstanding loans while public sector banks are at 14%.
  3. Here is the list of Government banks stating their bad loans. SBI tops the list with around 34,000 crore rupees of NPAs. The other top banks are PNB, Bank of India, IOB, and Bank of Baroda.

      

  1. The stocks of private sector banks are rising in a better way as compared to the public sector lenders. Due to bad loans, the share value of PSBs has been decreased.
  2. Bad debts have also affected the net profit of public sector banks.
  3. The market value of 24 listed banks is Rs. 2.6 lakh crore while the total amount of bad loans they are holding is Rs. 4 lakh crore.

According to RBI, if a loan is not generating any income to the lender, it should be declared as a non-performing asset. If a loan has not been paid for 90 days, then it is labeled as a bad loan. India and the RBI need to reform the rules to fight with the bad loans and the strict norms should be there for the loan defaulters. The bad loan can be really bad for the economy and the banking sector.

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