Samnidhy Weekly Newsletter

Samnidhy Weekly newsletter – Journal 1



NPAs and Recapitalisation

By Aditya Prakash Pandey

One major challenge for Indian banks today is increasing NPAs, Collateralized Mortgage Obligations (CMOs), Collateralized Debt Obligations (CDOs), Collateralized Loan Obligations (CLOs) and other stressed assets. NPAs currently stand at 12.1% and after recognizing Rs 3.3 trillion of loans as NPAs the figure will grow above 16%. The recovery rate has now gone down from 22% in March 2013 to 10.3% as on March 31, 2016, but the NPAs are still growing. This clearly indicates that the problem of NPAs is not going to be resolved anytime soon unless some measures are taken. Another important point to note is that public sector banks cover more than 70% of the banking market and the rest is covered by private sector banks and foreign banks. With an expanding market and a larger proportion of NPAs to total assets, the public sector banks contribute for the maximum proportion of the total NPAs.

Why is ‘Solution to NPAs’ so important?

Banks earn on loans. They raise money at a lower rate and distribute them as loans at higher interest rate. The margin is what the banks earn as profits, excluding other expenses. NPAs in banks’ balance sheet limit this process.

–    NPAs lead to the lower availability of capital in hand to lend as loans and thus lower credit creation and lower banks’ profitability.

–    Having a large portion of NPAs on financials leads to loss of investor’s confidence and interest in the bank. This makes it difficult for banks to raise money from the wholesale market or capital from equity investors and further reduces bank’s loaning capacity.

This debt crunch is slowly eating into banks’ growth with rising NPAs. This scenario of continuously increasing NPAs and continuously reducing recovery rate has the potential to lead to the collapse of the banking system. Functioning of banks has been affected by growing NPAs and decreasing profitability. This can be seen from the changes in their business model. Lack of funds is leading to a lack of credit growth. So, banks have now started to get out of capital intensive brick and mortar banking model and are moving towards digital and online platforms. They are also moving out of international business to focus more on domestic market due to a scarcity of capital. On a broader perspective, it also affects the economy as it has a direct impact on the trade deficit and trade balances.

In 2016, the government allocated Rs. 25,000 crores for the recapitalisation of PSU banks. This figure has been reduced to Rs. 10,000 crores for the present fiscal year. This measure was necessary as banks needed to overcome the stressed assets and NPAs. Also, this would help the banks maintain the prescribed Capital Adequacy Ratio (CAR) as per the Basel III norms. Recapitalisation would help banks with additional capital for credit growth. But the bigger question is- Is this amount going to help in solving the problem of NPAs? If yes, to what extent?

The amount is not sufficient when compared to the size of NPAs. The reduction in the recapitalization amount has been compensated for by giving infrastructure status to affordable housing projects, as a major chunk of NPAs is stuck in such projects. The recapitalisation will help banks cover their stressed assets with the fiscal deficit target set to 3.2%. The provision for NPAs has been increased from 7.5% to 8.5%. This will reduce tax liabilities of the banks. So, in all, a balance has been maintained with the recapitalization amount and association of other measures to curb the NPA problem. But, much more needs to be done if the problem needs to be fixed once and for all.

Relevance of Debt-to-GDP Ratio in Discerning an Economy’s Health

By Deepika S

Sovereign debt is the debt owed by the central government. It is issued in foreign currency in order to fund the country’s development needs. This debt can be further categorized as internal and external debt. Recession, ad-hoc spending and a quest for higher economic growth have resulted in higher levels of sovereign debt across the globe. Between the years 2002-2015, the global debt rose from 200% to almost 226% of the GDP.

Significance of debt-to-GDP Ratio

The continuous rise in debts has resulted in a new metric: debt-to-GDP ratio. It determines if the country’s sovereign debt is too high given its gross domestic product. For instance, if sovereign debt levels are too high, it might create panic among foreign investors resulting in a withdrawal of FDI or it might leave the government with the option of increasing tax rates resulting in low/stagnant economic growth. Further, it may lead creditors to seek higher interest rates when lending. These discussions have paved way for the argument that high debt-to-GDP ratios cause macroeconomic instability which is not healthy for the growth.

Reliability of debt-to-GDP Ratio

In actuality, there are many exceptions which can’t be explained using this ratio. For instance, Japan’s debt-to-GDP ratio in 2011 is over 220%, but its economy received very little analyst attention. Meanwhile, Greece’s was only 160% and many rating agencies were predicting its collapse. In addition to this, a close scrutiny of the ratios of different countries shows that the relationship between debt-to-GDP ratio and macroeconomic instability is weak.




Analyzing the above graphs, we can infer that the countries with higher debt levels are highly developed and comparatively economically stable. But again, this inference doesn’t apply to all countries and has exceptions.

Reasons for Disparity

A higher debt-to-GDP ratio is acceptable when the creditors are domestic investors, when an economy is rapidly growing, and when an economy issues securities (debt denominated) in its own currency.

The ratio is mute about the interest rates associated with the debt. Let’s consider 2 countries, A& B, with similar debt-to-GDP ratios. A’s debt is due in 30 years at 5% interest rate, whereas B’s debt is due in 2 years at 20% interest rate. It is evident that B is worse off in comparison to A. They are liable to pay the same amount for a shorter duration at a higher interest rate. However, the ratio downplays the severity and shows both countries as equally well-off.


Overall, though debt-to-GDP is one of the important metrics to be looked at to discern the economic health of the country, there are many other metrics that must be factored in as well.


By Charudutt Sehgal


The economic progress of a nation and development of its banking sector is invariably interrelated. The banking sector is an indispensable financial service sector supporting development plans through channelizing funds for productive purpose, intermediating flow of funds from surplus to deficit units and supporting financial and economic policies of the government. Banks serve social objectives through priority sector lending, mass branch networks and employment generation. Maintaining asset quality and profitability are critical for banks survival and growth. In the process of achieving such objectives, a major roadblock to banking sector is prevalence of Non-Performing Assets (NPA). In India, the problem of bad debts was not taken seriously until it was mandated by the Narasimham and Verma committee. The committee mandated the curbing of the particular issue because NPA direct towards credit risk that bank faces and its efficiency in allocating resources.

The aim of this research paper is to study the current trend of NPAs in Indian scheduled banks (up to 2013-14 only). The paper further examines the critical reasons behind the rise of this issue, its impact on Indian banking sector and Indian economy. In order to understand the criticality of the problem an effort has been made to study what impact NPAs have on ease of doing business rankings. Furthermore, the paper concludes with some of the important measures which if implemented then can improve the current scenario of NPAs in SCBs.

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By The Editorial Board of TJEF

(Anil Shankar, Gandhali Inamdar and Isha Varma)


Demonetization has been the buzz word since November 8th 2016 when our Prime Minister made the historic announcement about the decision to discontinue the 500 and 1000 rupee notes. This historic decision has affected almost all the sectors. Some have benefited while others have suffered. This paper intends to analyze the effects of demonetization on the major financial institutions and the Indian economy in general.

Effects of Demonetization on Banking sector

Since the advent of asset quality review (AQR), there has been a rise in the number of NPAs. To get an idea, the GNPA of banks is 6 lakh crore as of June, 2016 which is 8.2% of the total loans1. These are only the NPAs as there are an equal number of restructured loans which might transform to NPAs in future.


Figure 1: Total NPAs as of March 2016, Source: Finance Ministry

A recent data provided by the Finance ministry, which has been depicted in Figure 1, shows that 5.3 lakh crore of the 6 lakh crore NPAs are under the public sector banks. It’s clearly visible that there has been a rise in the NPAs from October 2015. This can be attributed to the ever greening of loans which led to the creation of a distorted picture of the banks. Though the asset quality review led to the identification of such NPAs which were previously classified as standard, the problem of NPAs existed since the 2008 financial crisis but remained hidden due to the above mentioned reason.

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by Divya Ramesh


IT sector in India can be categorized into the following segments-

  • Software products and engineering services (own software products)
  • IT services (application, website development)
  • IT enabled services (medical – transcription, BPOs, ERP)
  • IT hardware (PCs, laptops, mobile phones)

The IT industry has had a 5-year CAGR of 10.1% from 2008-2009 to 2015-2016 of which the exports markets had 12.6% and the domestic market had 3.8%. Though the export market of IT contributes to a major share of revenue, the domestic market is strengthened with a steadily rising number of mobile applications, e-commerce services and the government’s strategic push to a digital economy.


  • Government and BFSI verticals contribute to 35% and 30% of the domestic IT revenue respectively
  • Key drivers of the IT sector:
    • Government projects
    • BFSI
    • Telecom
  • IT infrastructure is key in digitalizing the existing government processes
  • Government initiatives such as “The Digital India” program boosts the domestic IT Industry


  • The 2017 union budget primarily emphasizes on a digital economy with increased cashless transactions aimed at weeding out corruption within the country. This shift towards digital payments and use of online portals for secured transactions increases the demand for cyber security and it’s applications in future.
  • Statistics for period 2013-16 show that online traffic in the e-governance portal has increased from 2060 million to 4940 million transactions accounting for a 140% increase. This calls for the need of contemporary and competent IT solutions to manage the ever-increasing data and maintain support for such services.
  • Schemes introduced such as:
    • Aadhar pay
    • Digital modes of payment for political donations
    • Removal of service tax for online ticket bookings
    • Digital payments in petrol pumps, universities, colleges, etc. lead to increase in online transaction and thus provide more opportunities for the IT sector in terms of job and revenue.
  • The Budget has proposed to improve the digital payment infrastructure and online grievance handling. This will result in a huge increase in the online traffic and data to be handled thus increasing the involvement of the IT sector services.
BHIM app promotional features and Aadhar pay app for cashless transactions Increases the number of cashless transactions which would increase online traffic and would require more IT services help to establish the application on a large scale. Increased web traffic also leads to the growth of cyber security.
High speed internet for Gram Panchayats Increases the connectivity thereby driving the cloud infrastructure of the IT sector. IT would also encourage the gram panchayats to buy phones improving the IT hardware sector
DigiGaon to provide education through digital technology, tele-medicine etc., To create digitally able citizens which would require IT infrastructure in terms of application and data management
Core banking support for cooperative banks and encouragement to provide core banking software Government rope in IT companies to sell core banking software strengthening the domestic IT sector

Thus, domestic IT market is expected to grow at CAGR of 10 % according to CRISIL reports and long-term growth will be achieved through e-governance initiatives of central and state government.

Though the export IT market seems to have become a bit volatile after Brexit and Trump’s assuming office as President of the US, there is a ray of hope with the disruptive Indian market steered by a number of digital initiatives taken by the Indian government.