India is the only bright spot with a high growth rate of around 7.5% in an otherwise turbulent world with major economies either decelerating or remaining flat. But, there is a dark spot on Indian economic landscape which if not removed urgently, could prove to be a major drag. This pertains to increase in non-performing assets [NPAs] of banks to unsustainable level.
Currently, NPAs [loans which do not yield return] of Indian banks are about Rs 400,000 crores. Including restructured assets [bad loans made to look like normal assets by relaxing terms], the total stressed assets are Rs 800,000 crores or 11.25% of gross advances. For public sector banks [PSBs] alone, this is much higher at 14%.
The problem has been building up for more than a decade but the previous dispensation camouflaged it behind a smokescreen.
For the first time ever, we have a governor, RBI Raghuram Rajan who does not believe in business as usual. So, he got an asset quality review [AQR] of all PSBs done and directed them to clean up their balance sheets by March 31, 2017.
Accordingly, all afflicted banks have made provisions on an unprecedented scale in third quarter of 2015-16 [State Bank of India alone Rs 20,000 crores] and the process will continue till last Qr of 2016-17. The resultant erosion in their capital base has raised alarm bells. How does the government intend to salvage them and ensure that fresh NPAs do not come up?
As per finance minister [FM], PSBs need capital infusion of Rs 200,000 crores over 4 years up to 2018-19 to meet Basle III norms. Of this, the government has committed Rs 70,000 crores as budget support viz., Rs 25,000 crores each during 2015-16 and 2016-17 and Rs 10,000 crores each during 2017-18 and 2018-19.
Recently, RBI relaxed the norms in regard to what constitutes Common Equity Tier 1[CET1] capital. The revised regulations allow a bank to recognise 45% of its revaluation reserves, 75% of its foreign currency translation reserves [FCTR] and deferred tax assets [DTAs] related to timing difference up to a maximum of 10% as CET1 capital. This is expected to free up capital estimated anywhere between Rs 25,000 crore and Rs 35,000 crore.
But, these sources add up to only Rs 100,000 crores. What about the balance Rs 100,000 crores? The government expects banks to garner this from divestment of shares and internal resources. This is an inconsistent and self-defeating idea. With huge NPAs weighing down on their profitability, this is wishful thinking as neither they will have any surplus left nor be able to fetch a good price from sale of their shares.
FM has talked of empowering banks to recover money from defaulters. This is easier said than done. The existing laws viz., SARFAESI [Securitization and Reconstruction of Financial Assets & Enforcement of Securities Interest] and DRT [Debt Recovery Tribunal] lack teeth. Besides, it won’t be easy to pass the proposed Bankruptcy Code & Insolvency Law so soon.
No wonder, government might end up providing entire amount as budgetary support. An indication to this effect was given by minister of state for finance, Jayant Sinha. In a recent interview, when confronted with ‘inadequacy’ of budget provision, Sinha opined ‘additional allocation will be made if need be’ as there can be no compromise on health of banks.
What is government doing to prevent resurgence of NPAs? Before that, we need to know why situation has come to such a pass? It is an outcome of past omissions and commissions by PSBs managements, indiscriminate grant of loans without conducting due diligence, their frequent use for supporting fiscal profligacy of centre and states [loan waivers, bail-out of SEBs etc] besides economic slowdown which led to payment defaults.
To an extent, a default is caused due to economic deceleration on which individual borrower has no control, this can be averted with economic revival. This will not only prevent fresh slippages but also help recover some of the past loans. But, the big worry is wilful defaulters who are fed on political-cum-bureaucratic patronage and take full advantage of loopholes in existing laws.
Last year, Modi signalled an end to this when he opined “henceforth, PSBs won’t get even a phone call from his office or any other ministry”. The government needs to walk the talk. It needs to put in place institutional mechanisms [including proper monitoring and surveillance] and ensure that managements are fully empowered to run them on professional lines.
In this regard, the P Nayak committee had recommended (i) setting up of an autonomous Bank Boards Bureau [BBB] with a mandate to select the top management and guide their operations; (ii) setting up of a bank investment company [BIC] where all government shares in PSBs will be vested and (iii) divestment of its shareholding in all PSBs to below 50% leading to relinquishment of management control.
While, the government has taken action on (i) by setting up a BBB under Vinod Rai, ex-CAG, it is not inclined to pursue (ii) and (iii). It has categorically ruled out divestment of its holding in PSBs to below 50% [sans IDBI where already this exercise is under way]. In this scenario of continued majority ownership and control by government, it will be business as usual and it won’t be possible to prevent political and bureaucratic interference.
As in the past, the government would have ended up wasting tax payers money in re-capitalizing banks. In the future say, 5 years from now they will again come up with a big hole in the form of NPAs/stressed assets to be filled with another round of capital infusion. The vicious cycle will continue.
Commenting on recent carnage in stocks of PSBs [prior to budget], Jaitely stated “investors should not overreact; they should look at sound economic fundamentals and situation will be under control soon”. His assurance will carry conviction only if government carries out structural reforms in working of PSBs.