India’s banks may be sitting on an NPA time bomb, which could be more powerful than the projected Rs 9.5 lakh crore. And, it would start exploding once the moratorium is lifted on March 31 on declaring stressed assets of small and mid-size businesses as non-performing assets.

Add to that, the NPAs on Mudra loans, which have been piling up every quarter, loans of state electricity distribution companies, which could top Rs 80,000 crore by March, and, the newly added telecom sector dues of Rs 92,000 crore to the government, which the Supreme Court has asked them to pay by January end. The agriculture loan portfolios that are witnessing a rise in bad debt, is yet another cause of concern.

State-owned banks will take the biggest hit because it is these lenders, which have been bearing the brunt of keeping stressed assets of MSMEs out of their loan books after September last year when Finance Minister Nirmala Sitharaman announced measures to lift up the sagging economy by ensuring credit on easy terms.

Rajnish Kumar, Chairman of the largest public-sector lender, the State Bank of India, who might have tried, to assure investors that the country’s credit woes were very much under control, now appears to be conceding that the bank credit growth will remain an issue in 2020. But, when the skeletons finally start falling out of the government’s closet, he would not be there. His three-year term is coming to an end in October.

His bank may not suffer to that extent as the recoveries from the high profile Essar Steel case may improve the overall NPA coverage and keep the cost of credit under check but ask any banker in private, and they say, “from April 1, the loan books of the lenders will start recognising the missed payments by MSMEs as NPAs. They have gone on a credit binge along with non-banking finance companies and new retail customers since September last year”.

Prime Minister Narendra Modi’s flagship MUDRA scheme that aims to provide easy credit without collateral to small and micro-enterprises and, issues loans up to Rs 10 lakh under different categories, has generated an NPA of over Rs 17,000 crore in about four-and-a-half years since its inception, besides a loan write-off of about Rs 2 lakh crore.

The RBI, has, from time-to-time, issued instructions to banks to be vigilant on MUDRA loans. Last year, Governor Shaktikanta Das had told the chief executives of PSU banks, in a closed-door meeting, to be cautious while disbursing to MUDRA beneficiaries to avoid a pile-up of NPA accounts. Former RBI governor Raghuram Rajan had already warned the banking system of MUDRA building toxic loans.

A surge in farm loan waiver

RBI data shows the gross NPA of PSU banks in the farm sector and allied activities touched Rs 1.04 lakh crore by mid-2019 as against a total credit of Rs 9.42 lakh crore. Hence, the proportion of gross NPAs to the total credit stood around 11%. An unprecedented surge in farm loan waivers has been responsible for a general decline in the credit culture. In the last four years, 10 states, including Karnataka, have announced the farm loan waiver to the tune of Rs 2.5 lakh crore.

Besides, the loans were sanctioned in 59 minutes through digital platforms to almost unknown borrowers, could pose another risk to recovery in the coming years, according to banking experts. This scheme for small-ticket loans by the public sector lenders was introduced by the prime minister in November 2018. The banks are yet to take stock of looming NPAs in this segment.

The next is India’s shadow lenders. They witnessed stress in their asset quality during the first half of 2019-20. The gross NPA ratio of the NBFC sector increased from 6.1% at end-March 2019 to 6.3% at end-September 2019. While the importance of NBFCs in credit intermediation is growing, the IL&FS episode has brought the focus on the asset-liability mismatches of these lenders, which poses risks to the NBFC sector as well as the financial system as a whole.

To address such concerns, the RBI has introduced requirements such as liquidity coverage ratio and stress tests on the lines of banks, but economists including Modi government’s first chief Economic Advisor Arvind Subramanian have been demanding an asset quality review for NBFCs similar to banks.

In its latest Financial Stability Report, the RBI had raised concerns that banks’ NPAs could rise to 9.9% of their advances by September this year from 9.3% at present. But experts believe it could be much more than that.

Already saddled with bad loans, the state-owned lenders’ strength of the loan book have been completely weakened as they are pre-occupied with the merger process.

A United Nations report on Friday has also drawn the attention of rising corporate debt in India, which exceeds 40% of the GDP. Together with a relatively high share of non-performing loans in the banking system in an era of slowing growth and heightened trade tensions, these corporate debts, could represent a major source of financial vulnerability, it said.

Some indicators also show that a significant part of the corporate debt has been channelled neither to productive investments nor high productivity sectors. This trend has adversely impacted medium-term growth and has also raised concerns over debt sustainability in the emerging economies, including India.