Economy: Banking on the Budget

Published: February 8, 2016 - 15:10 Updated: February 9, 2016 - 13:24

The public sector banks urgently need measures to tackle the bad loan crisis and all eyes are on Jaitley

Sindhu Bhattacharya Delhi 

India’s public sector banks (PSBs) need intensive surgery and not Band-Aid solutions to mounting bad loans. A comprehensive resolution of the bad loan crisis is bound to bring with it considerable pain but the government cannot wash its hands of the issue since it is a majority owner of PSBs. Also, the solution must come swiftly, in the upcoming Union Budget, if the government is serious about boosting a flagging economy which is already facing external stress and weak internal economic indicators.

The PSBs are sitting on over Rs 7 lakh crore of stressed assets (including non-performing assets or NPAs and restructured loans). The Reserve Bank of India (RBI)’s latest Financial Stability Report says that under the baseline scenario, the gross non-performing assets (GNPA) ratio of PSBs may go up to 6.3 % by September 2016 from 6.2% in September 2015. Though it may improve thereafter to 5.8% in March 2017, the report sounds a word of caution: “Under a severe stress scenario, it may increase to 8.0 per cent by March 2017.”

Speaking at a lecture in New Delhi recently, RBI Governor Raghuram Rajan said existing loans will have to be written down significantly, some banks will have to merge to optimise their use of resources and the government should allow the boards of PSBs more freedom to differentiate their banks and offer more compensation for bank directors. In short, some very drastic measures are required, especially if his proposal on bank mergers is taken seriously.

A big reason for the PSBs’ woes is India’s inability to get rid of crony capitalists and their influence in the corridors of power. Take the case of the flamboyant Vijay Mallya, who owes a consortium of PSBs about `7,000 crore for the now-defunct Kingfisher Airlines. He steadfastly refuses to pay up. The banks, though entitled to seek their money, have been unable to force Mallya to repay his loans even as his lavish lifestyle continues unabated. This may have prompted Rajan to issue a stern warning against vulgar display of wealth by people who have been unable to repay loans but it has not led to any resolution as far as the banks are concerned.

Sometimes, loans don’t turn bad because of crony capitalists but due to an industry-wide phenomenon. Loans PSBs have advanced to state electricity boards (SEBs), for example, are also now under severe stress. Analysts say that anywhere between two to seven percent of PSBs’ loans have been made to state power utilities and much of this money may be in danger as the sector teeters. The government’s recent move to restructure these loans by making respective state governments liable for the debt looks nice on paper but may be tough to implement. Some other sectors too may come to grief as far as loans are concerned.

And the loan problem could worsen in the short term as the December quarter earnings of PSBs are expected to bring more bad news. Take a cue from India’s second largest private lender, ICICI Bank, which reported a sharp increase in GNPA to 4.72% of total loans in the December quarter against 3.77 percent in the September quarter and 3.4% in the year-ago period. ICICI Bank’s total provisions for bad loans nearly tripled to `2,844 crore from Rs 942 crore, quarter on quarter. If large, successful private banks are unable to stem the tide of rising NPAs, there is every likelihood that PSBs will not be able to hold their own either.

The NPA problem has been assuming alarming proportions over several years, but now it threatens to push the finances of the entire country into a tailspin. State-run banks control about 70% of the banking industry and unless they are refuelled with adequate funds, it is difficult to get the economy back on track by expanding the much-needed credit support to industries and individuals. Policy initiatives apart, the Budget needs to ensure administrative, tax and regulatory certainty to improve the business climate. This will revive the private sector investment cycle and boost growth which will in turn allow companies to restart paying their debts and also invest in the ambitious ‘Make in India’ programme.

The Budget should not only suggest measures to revive public investment but also ways in which banks can lend more, and without fear of bad loans, if there is to be a sustained economic revival. Union Finance Minister Arun Jaitley has been hinting at the government’s commitment to hand-holding PSBs and pumping in large amounts of cash to recapitalise them. Not just bad loans, PSBs are simultaneously struggling with falling growth of bank credit. This deals a double blow to the PSBs’ health.

On recapitalisation, the government last year announced a revamp plan, Indradhanush, to infuse Rs  70,000 crore in PSBs over four years. This plan also mandated the banks to raise a further Rs 1.1 lakh crore from the capital markets and thus remain compliant with global risk norms Basel III. The government will provide
Rs 25,000 crore of the promised first tranche in FY16 (which means by March end, a large part of this will already be given) but now, there are enough indications that even this amount may not be enough to save PSBs. 

The banks’ need for capital has risen further for two reasons: one, the RBI has asked them to classify 150 top troubled corporate accounts as NPAs and make provisions accordingly which means their capital adequacy might be impacted. They can only maintain this adequacy by asking the government for more capital. Two, banks are hardly likely to raise even a fraction of the Rs 1.1 lakh crore envisaged by the North Block mandarins because of choppy capital market conditions. This brings us back to the crying need of PSBs to get even more capital than already promised under Indradhanush.

On its part, the government has been speaking of several remedies. It was earlier mulling creation of a ‘bad bank’ –  which can take over the bad loans of all PSBs and then decide how to recover the money from these defaulting borrowers. But this plan seems to have been junked. Other measures being contemplated include drafting a comprehensive bankruptcy law which will make it easier for a business to fail and will enable speedy resolution of stressed assets. The Bill has been introduced in Parliament and could be passed during the Budget session.

Then, there is a proposal for a fund for stressed assets under the National Infrastructure Investment Fund (NIIF) which may provide equity to troubled companies. How this will function and what its corpus would be remain to be seen.  The government has also been talking of a joint lenders’ forum (JLF), a corporate debt structuring (CDR) mechanism and so on to tackle bad loans. A JLF would mean some banks would join hands to tackle bad loans of specific companies and a CDR would mean debtors get extensions on repayments and so on. Will we get more clarity on these remedies in the upcoming Budget? Or will the Minister think of something more radical?   

The public sector banks urgently need measures to tackle the bad loan crisis and all eyes are on Jaitley
Sindhu Bhattacharya Delhi 

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