During her second interactive session with the media on the state of the Indian economy and measures to give a boost, finance minister, Nirmala Sitharaman announced a number of bold reforms in the banking sector with major focus on consolidation of 10 public sector banks [PSBs] into 4 big entities – an overarching objective being to make them globally competitive and act as a foundation for achieving US$ 5 trillion milestone.
Sitharaman informed about a substantial reduction in their gross non-performing assets [GNPAs] from 11.6% of total loans as on March 31, 2018 to 10.3% on March 31, 2019 [courtesy, huge recovery of over Rs 300,000 crore made possible largely by concerted action under the Insolvency and Bankruptcy Code (IBC) – a legislation on resolution of stressed assets enacted in 2016]. She also told that during the first quarter of current year, 14 PSBs reported profit as against only 4 showing profit in the previous Qr.
This is commendable especially when seen in the backdrop of banks battered by high non-performing assets [NPAs] being left to their fate under the erstwhile UPA-dispensation. This should give relief to the tax payers whose money has been used to recapitalize them [since 2015-16, the union government has injected over Rs 300,000 crore]. However, the relief may proved to be short lived.
This is because fresh NPAs of about Rs 300,000 crore are in the making primarily due to non-bank finance companies [NBFCs] such as Infrastructure Leasing and Financial Services [ILFS] going bust [it has an outstanding debt of Rs 90,000 crore – a big chunk being under serious stress] as also other big entities viz. Dewan Housing Finance Corporation Limited [DHFCL] in dire straits. Substantial amount of NPAs also exist in infrastructure and power sectors.
The other worrying sign is steep increase in the money banks are losing on account of frauds. The number of cases of frauds reported by banks increased from 5,916 during 2017-18 to 6,801 during 2018-19 [according to RBI’s annual report]. However, the amount involved in these frauds saw a steep jump from about Rs 41,000 crore during 2017-18 to about Rs 71,500 crore during 2018-19 – hike of 74%. Of the total fraud value in 2018-19, PSBs alone accounted for about Rs 64,500 crore or 90%.
Starting from a low of close to Rs 2000 crore each during 2008-09 and 2009-10, the value of frauds kept on increasing year-after-year and the trend continued even under Modi – dispensation. During 2015-16 and 2016-17, this was about Rs 19,000 crore and Rs 24,000 crore respectively. Cumulatively, during the last 11 years, a total of 53,334 cases of fraud were reported involving a mammoth Rs 205,000 crore. Even worse, the average lag between the date of occurrence and its detection by banks was 22 months.
As it is, full recovery of NPAs is ruled out. The very act of an asset being declared as non-performing or stressed shows that if at all the loan is recovered, it will be at a discount. Further, the experience of the cases being processed under IBC shows that the defaulting promoters and potential bidders try all possible means including delaying tactics such as challenging the decisions of National Company Law Tribunal [NCLT] in courts to ensure that the discount is steep.
A case in point is Reliance Communications Limited [RCL] whose NPA is worth about Rs 45,000 crore. Last year, following an agreement between the two brothers [read: Mukesh Ambani and Anil Ambani; RCL is owned by the latter] for sale of RCL assets viz. spectrum, towers etc, it was hoped that the banks would be able to recover 80-90% of the amount. But, thanks to vested interests at work, the company has now come under liquidation and reportedly, they won’t be able to get more than 25%.
Jet Airways provides another classic example where delayed action by the lenders in coming up with a resolution plan pushed the company to the doorsteps of the IBC. Even under the Code where a window of opportunity is available to sell the firm as a ‘going concern’ to fetch a reasonable amount, the way things are proceedings, this too will go under the hammer yielding a tiny fraction of the loan amount for the banks. This holds for several other cases.
In cases where the money at risk is on account of sheer fraud, the possibility of recovering even a fraction of this is remote. This is because the funds taken away in this manner are normally deployed in shell companies – most of those located in foreign jurisdictions – which makes it all the more tough to get back.
We are thus staring at a scenario whereby at one level, the government encroaches upon tax payers money [even those of millions of policy holders e.g. the Life Insurance Corporation (LIC) was directed to pump thousands of crore in IDBI Bank] to shore up the banks capital devastated by the defaulting borrowers and fraudsters and at another, more and more cases of funds mis-appropriation and misuse keep cropping up – causing more erosion. This sounds more like filling water in bucket that has a hole!
The government must do something drastic to contain this dangerous trend. The malaise being far more serious in PSBs, its origin may have a lot to do with their ownership structure which gives rise to a mindset ‘even if they lose money, so what, the sovereign union is there to make up’.
As long as ownership and control remains with the government, consolidation of banks or any number of governance reforms [FM talked a lot on these] will be of little help in making them healthy and robust; forget transforming them into globally strong entities capable of supporting US$ 5 trillion economy.