After incurring losses for four consecutive years [2015-16 to 2018-19], public sector banks [PSBs] are expected to post profits in the range of Rs 23,000 – 37,000 crore during 2019-20. Their gross non-performing assets [GNPAs] are slated to decline from 10.3% as on March 2019 to 8.1 – 8.4% by March 2020. The net NPAs [NNPAs] are projected to go down from 5.3-5.4% to 3.5-3.6% during the same period.
Four years ago when the NPAs started showing an unprecedented increase compelling the banks to make provision in the balance sheet – as prescribed by the banking regulator viz. Reserve Bank of India [RBI] – and resultant losses, no one would have ever thought that the turnaround would come so soon.
Yet, if it has come, the credit goes entirely to Modi – government which has proactively worked on a multi-pronged strategy to not just enable them make a transition from losses to profit but also lay the foundation for their health and growth in the long-run.
First, the government asked the RBI to conduct an asset quality review [AQR] to recognize the NPAs which were created due to indiscriminate lending – especially during 2008-2014 – without conducting due diligence and assessing project viability [loans were given mostly to those patronized by the ruling establishment] and swept under the carpet under the erstwhile UPA – dispensation.
The surge seen under Modi – regime [especially during 2016-17 and 2017-18] is due to recognition of past bad loans. These were not created during his tenure as claimed by critics.
Second, it enacted the Insolvency and Bankruptcy Code [IBC] – a robust and impeccable legal and institutional framework for recovery of bad loans in fast track mode. From the day an account becomes NPA, the bank get 6 months to either get the defaulting borrower pay up or his assets be transferred to new owner who can pay up. On its expiration, the case is referred to National Company Law Tribunal [NCLT] who gets 6 months to complete the resolution process.
Strictly adhering to time lines, RBI has disallowed even a day relaxation even under most compelling circumstances [for instance, power NPAs]. The proof of pudding is in eating. So far, banks have recovered over Rs 350,000 crore including Rs 200,000 crore settlement at the pre-admission stage and Rs 150,000 crore under IBC.
Third, the government has made drastic changes in the eco-system of lending with emphasis on due diligence for loan sanction, transparent processes and prompt reporting of large defaults. It has brought to end the days of what Modi described as ‘phone banking’ [a euphemism for giving loan to a person on recommendation of political bosses]. This has helped in reining in fresh slippages.
Meanwhile, the government has infused much needed capital to the banks [a big chunk of it raised by issuing recapitalization bonds] for meeting their provisioning requirements and expanding credit needs consistent with growing industries and businesses. It has thus, ensured that the economy does not suffer even as the process of resolving and recovering NPAs is underway.
The strategy has worked as seen in the drastic turnaround in the performance of PSBs in a short period. There is strong reason to expect sustained improvement particularly considering the fear that IBC instills in the mind of a defaulting borrower that he will lose ownership and management control of the company if he does not turn up to clear the dues. So, he will pay up.
But, there is no room for complacency. This is because even now a lot more ground needs to be covered. A further reduction in GNPAs of over 2% [from projected 8.1-8.4% by March 2020] is needed to get the banks into a comfortable zone. Plus, they should be able to generate enough surplus to service the recapitalization bonds issued by the centre to recapitalize them.
There is also dire need to prevent fresh slippages. Apart from reforming the eco-system of lending to big corporate, there is a new challenge from MUDRA [Micro Units Development Refinance Agency] loans. Under this scheme so far, loans worth about Rs 700,000 crore have been given to 15 crore entities. There is an inherent element of vulnerability here as loans are given without collateral.
At present, NPAs under MUDRA are only around Rs 15,000 crore or 2-3% of the loan. This is well within the safe limit of 5-6%. But, the government and banks need to be watchful to ensure that the situation does not slip out of control.
Likewise, it needs to be careful in dealing with agricultural loans which have reached a high of Rs 1100,000 crore [2018-19]. With state-after-state promising loan waivers, the banks could face increasing risk particularly keeping in mind the fact that the former do it without adequate funding from the budget and hence would end up making a hole in the latter’s balance sheet.
Another area where the government needs to be circumspect is rising debt of non-bank finance companies [NBFCs] [for instance, Infrastructure Leasing and Financial Services (ILFS) has a debt of over Rs 90,000 crore and defaulted on servicing a big slice of it] and mammoth credit lines offered by PSBs to bail them out. The banks should guard against these loans becoming NPAs.
A robust institutional framework backed by a stringent law by itself won’t deliver. It is equally important to have a ‘strong’ and ‘decisive’ leadership. At present, we have one under Modi. But, in democracy, there is no guarantee that he will continue. There is an urgent need to insulate PSBs from political masters. The government should divest majority ownership and control in line with the recommendation of an RBI committee under P Nayak.
Post-divestment, the managements will be able to run the banks strictly on economic and commercial considerations free from political and bureaucratic interference. This will nip the problem of NPAs in the bud thereby ensuring their health and growth in sync with the need to put economy on a high growth trajectory.