A tsunami of NPAs in the making

Even as the public sector banks [PSBs] are struggling to cope with the disastrous consequences of unsustainable high level of non-performing assets [NPAs] [over Rs 600,000 crores on last count] on their balance sheet as also choking flow of credit, political establishments in almost all states as also at the central level are at work to make life even tougher for them.

In the just concluded elections in Uttar Pradesh [UP], prime minister Modi promised loan waiver to all small and marginal farmers. The commitment was reiterated in almost every election speech ad infinitum. Now, that BJP has got a resounding mandate with ¾th majority, the state government will have no escape from having to redeem this pledge. This will entail a financial burden of around Rs 36,000 crores.

In Punjab, Captain Amarinder Singh had promised waiver of all outstanding farmers debt in his party’s [Congress] election manifesto. He too has been catapulted to the seat of power winning assembly elections with 2/3rd majority. He inherits an almost bankrupt treasury; yet he will have no escape from redeeming this commitment or else he runs the risk of denting his credibility.

In Maharashtra, Shiv Sena [SS] – BJP’s alliance partner in the state – has challenged Devendra Fadnavis government to grant same concessions to farmers as promised by Modi for UP farmers. The opposition legislators acting in concert with SS have even paralyzed functioning of the assembly over this issue. The loan waiver to farmers in this state is estimated to cost over Rs 100,000 crores. Fadnavis is worried that granting this will frustrate his plans to for requisite capital spend for building infrastructure in agriculture.

There is clamor from many other states including Karnataka, Tamil Nadu for granting loan waivers to farmers who are undergoing unprecedented misery. The matter also resonated in the parliament wherein all parties cutting across politically affiliations pestered the union government for extending loan waiver to farmers all over India. However, the latter was non-committal.

None of the states have the stomach to meet the liabilities thrown up by loan waiver. Any attempt to do so will risk their exceeding the fiscal deficit target under the Fiscal Responsibility and Budget Management [FRBM] Act. This will lead to downward revision in their ratings in turn, increasing the cost of their borrowings. This will exacerbate their already high debt. Their development and welfare programs will be seriously compromised.

The states will therefore, look at the centre for bailing them out. It is unlikely that the latter will transfer more money than what is mandated under the recommendations of 14th Finance Commission only to help former fund liabilities created on their own volition [poll promises]. Under such circumstances, PSBs will become easy targets.

In 2014, in the run up to assembly elections, K. Chandrashekar Rao, Telangana Rashtra Samithi [TRS] having promised farmers loan waiver costing about Rs 19,000 crores and unable to arrange funds from state exchequer had pestered then RBI [Reserve Bank of India] governor, Raghuram Rajan to provide support. The latter had then, said an emphatic ‘no’. But, today, RBI could be more amenable to pressure from the political establishment.

The PSBs could be more vulnerable if under pressure from parliamentarians of all hues, the union government were to announce a scheme for exonerating distressed farmers in all states from their debt obligation. With the next general elections just about 2 years away and farmers being a huge vote bank, such a possibility cannot be entirely ruled out. In such a scenario, the balance sheet of banks will bleed even more profusely.

There is a bigger risk. This was best articulated by Chairperson, State Bank of India [SBI], Arundhati Bhattacharya, who while commenting on loan waiver opined “this will affect credit discipline as farmers will then have no intent to pay back fresh loans in the hope that they would get waiver at the time of next elections yet again”.

So, it won’t merely be one time impact on the banks [due to current waiver], their balance sheet will bleed perpetually as more and more loan waivers are granted in the future. This cult of non-payment irrespective of underlying economic condition of the farmers by itself is a dangerous sign. Unless nipped in the bud, this has the potential to permanently impair the banking sector.

The clamor for waiver won’t stop at farmers. This would extend to other sectors as well. For instance, under PM MUDRA [Micro Units Development and Refinance Agency] Yojna, during the last 2 years, a total of Rs 300,000 crores have been distributed as loans to over 60 million persons for small enterprises. Likewise, under “Stand-Up India”, every bank branch gives loan to a woman and SC/ST/OBC entrepreneur each or a total of 250,000 persons each year. Thousands of crores have been given under this scheme too.

Considering that such persons are as much vulnerable and disadvantaged as farmers and once the government starts the practice of waiving loans for the latter, it won’t be easy to avoid conceding to the similar demands coming from those segments. And, very much like farm loan waivers, reliefs for them also would be recurring.

Here, it is pertinent to look at the reaction of politicians to Bhattacharya’s statement. They argue that she being just an official [read an employ of a PSU] has no business to make an observation in an area which is the exclusive prerogative of elected leaders who are accountable to the people and know what is in their interest.

Undoubtedly, being the elected representatives of the people, parliamentarians and legislators have every right to enact laws and take decisions for their welfare. But, it is equally their responsibility to ensure that PSBs which are owned by the public [albeit via central government] are robust and healthy. They need to be fully aware of the fallout of their decisions on health of PSBs.

If, they are abdicating their responsibility and the so called employee [Chairperson] is raising a red alert, they need to mend their ways and take required initiatives to put things back on track. Modi – government which is committed to reforms and has demonstrated its seriousness by taking harsh steps in other areas should now show gumption to rein in this highly retrograde practice.

It can make a good beginning by pledging that it won’t allow any of PSBs to foot the bill of loan waivers granted by states. They should be made to pay for these from their own budgets and make efforts to generate required resources. The centre must not give them an easy way out by relaxing FRBM targets either.