Banks being stressed out

The government has decided to empower and protect State-owned banks to make commercially prudent settlements in cases of stressed assets. This was underscored by Finance Minister Jaitley recently after a high level review meeting of the performance of the banking sector. More so, as the Bankruptcy and Insolvency Code has been enacted and expected to become operational soon.

Besides, a further set of amendments to the debt recovery legislation are before a joint committee of Parliament which would further empower banks to tackle the rising non-performing assets (NPAs). The Cabinet on Wednesday approved a bill seeking to amend the debt recovery laws with an overall objective of improving the ease of doing business.

Banks have 6.2% of their total loans categorised as bad loans or non-performing assets. Another 7.9 per cent are restructured loans, meaning they were earlier bad loans. Consequently, according to Moody’s, banks in their run-up to March 2017 could report losses as much as Rs 74,900 crore

“Cabinet approves exfacto ‘The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions Bill, 2016,” an official statement said. The bill aims to improve ease of doing business, facilitate investment leading to higher economic growth and development, it added.

Shockingly, the cumulative loss of Rs 18,000 suffered by banks last fiscal have pushed them to a critical situation, even though the losses were mainly on account of higher provisioning for bad loans notwithstanding the State-owned banks made operating profits of Rs 1.4 lakh crore.

Though the government has not raised any alarm over this state of affairs, it is dealing with the situation quite firmly. Whereby, the it has earmarked Rs 25,000 crore for the recapitalization of PSU banks and would provide more if needed.

Undoubtedly, the NPAs of several banks went up beyond expectations. The most startling figures were of Punjab National Bank which showed NPAs increasing to 12.90 per cent of its gross advances from 6.55 per cent in the year-ago period, mainly because the bank recognised dodgy loans in capital goods, engineering, iron and steel and infrastructure sectors as bad debts. In absolute terms, gross NPAs jumped to Rs 55, 818 crore as against Rs 25,694 crore in the last fiscal.

Similarly, the NPAs of UCO Bank increased from 6.76 per cent in 2014-15 to 15.43 per cent in 2015-16 while for Bank of Baroda it went up from 3.72 to 9.99 per cent and Allahabad Bank from 5.46 to 9.76 per cent during the same period.

Notably, there are many other banks whose NPAs have increased significantly in the last one year. According to one estimate, the stressed assets in the country appear to be bigger than the size of New Zealand’s $170 billion economy!

An example: The Adani group, reportedly close to Prime Minister Modi has a debt of Rs 72,000 crore, an amount equal to the total debt of farmers in the country, according to a JD (U) Rajya Sabha MP. This is not all. According to him, corporate houses owed Rs 5 lakh crore to PSU banks of which Rs 1.4 lakh crore was alone owed by five companies, Lanco, GVK Suzlon Energy, Hindustan Construction Company, Adani Group and Adani Power.

Recall, the Supreme Court pointed out last month that the banking system mechanism of granting and recovering big loans appeared flawed and suggested the need to set up an expert panel to suggest remedial measures.

On its part, the Reserve Bank submitted to the court a list of big defaulters, each of whom had failed to repay loans worth Rs 500 crores. However, it put a caveat by stating that disclosures of defaulters would be prejudicial to the country’s economy. In fact, according to available figures, the loan amount has grown to over Rs 1 lakh crore.

Meanwhile, eminent advocate Prashant Bhusan made an 11-point suggestion to the Apex Court which included transparency in loan advancement and recovery efforts. According to him, there was no reason why the RBI could not share information with the public about defaulted loans and the reason for non-payment.

Undeniably, lack of strict monitoring by the RBI and banks has resulted in such a situation. In fact, some business houses do not take timely return of loans seriously as they feel there are influential people to save them from any crisis situation.

Surprisingly, some people continue to harp on the need for privatisation, citing the lack of efficiency of the government, but the track record of the sector is not all that encouraging. Indeed, the same people talk against subsidies for welfare schemes and think that privatisation is the panacea of all evils.

Importantly, the increasing stressed assets of banks have been the result of business houses not caring to repay public money, resulting in low profitability and reduced priority sector lending.

Apart from the Rs 25,000 crore allocated in the current financial year and around Rs 20,000 crore to be provided during 2017-18 and 2018-19, PSU banks need up to Rs 2,40,000 crore by 2018 to meet Basel-III capital norms. Obviously for this, the NPAs have to be reduced apart from hiving off non-core businesses and leveraging bond issuances.

But a recent report of Moody’s Investors Service found that the State Bank of India and 10 other public sector banks alone would need Rs 1.2 lakh crore in capital through 2020. Pertinently, at the Banking Summit in March, it was averred that as of September last, banks had 6.2 per cent of their total loans categorised as bad loans or non-performing assets.

Another 7.9 per cent were restructured loans, meaning they were earlier bad loans. Consequently, according to Moody’s banks in their run-up to March 2017 could report losses as much as Rs 74,900 crore. It further found that increased recognition and provisioning of non-performing loans would require a corresponding front-ending of capital requirements which suggests that capital constraints might remain a key credit weakness for public sector banks.

However, the enactment of the Bankruptcy Code would facilitate banks’ efforts to go after defaulters without the judiciary delaying the process inordinately. But the question is: How long would it take to practically nail down defaulters? This would be very necessary to put a check on bad loans. But it remains to be seen whether the banks would be able to bring to book some of the big defaulters who are aided and protected by influential politicians.

Clearly, the talk of banks privatisation as a panacea has no basis as the private sector is to blame for the present state of affairs. The RBI Governor Raghurajan has rightly rejected talks of privatisation of public sector banks and emphasised that the urgent need was for banks to clean up their balance sheets.

In sum, privatisation would not meet the objectives of priority sector lending and the whole system would be geared to serve the business class, which is obviously not desirable in the country. It appears the government is in no mood to foresee a banking crisis as the newly created Banks Board Bureau, headed by former Comptroller and Auditor General Vinod Rai is seriously examining the problem.

The question of NPAs needs to be tackled with greater insight before it gets out of hand. Additionally, bank managers have to be strict in giving credit and they need to check credentials judiciously without any bias from any quarter.

By: Dhurjati Mukherjee