There has been a substantial increase in bad loans and this is primarily because public sector banks have been very lenient on willful defaulters and on real estate sectors. The Reserve Bank of India (RBI) has asked banks to focus on recovery and follow a stringent credit appraisal procedure. The RBI has asked banks to remain cautious in the wake of a higher-than-expected rate hike that could have an adverse impact on the asset quality of banks. The RBI has directed the banks to monitor their asset qualities on a regular basis, especially with interest rates steadily inching upwards. This is the result of the recent downgrade of the country’s largest lender State Bank of India by credit rating agency, Moody’s Investor Services.

In the wake of surging NPA levels, banks have decided to get to tough on willful defaulters — borrowers who have not repaid their dues despite having the capacity to do so. An estimated Rs. 11,000 crore of funds are locked up with willful defaulters.

State-owned banks have witnessed a surge in the level of bad assets (loans) or NPAs in recent times. The gross non-performing assets (NPA) of public sector banks stood at Rs. 71,047 crore for the period ended March, 2011. A loan that stops earning interest after 90 days is defined as an NPA.

According to Crisil, the Indian arm of global ratings major Standard and Poor’s, a slowdown in economic growth and increases in equated monthly installments (EMIs) resulting from subsequent rate hikes by the RBI, would also increase banks’ NPAs. Rising interest rates would increase the EMIs of home loan borrowers alone by about Rs. 6000 crore annually,” the study said.