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Hard to Bank upon Business Barons

At the Board meeting of RBI held in March this year, Finance Minister Arun Jaitley said that there is no need to overstate the impact the overall lending activity of banks.

Vivek Srivastava
Publish Date: Apr 25 2016 3:18PM | Updated Date: Apr 25 2016 3:18PM

Hard to Bank upon Business Barons

Vijay Mallya’s flight out of the country despite huge debts brings Government-run banks credit policy in question. So Vivek Srivastava trails the loss of capital that cosy corporate world has been inflicting with impunity


Liquor baron Vijay Mallya, has turned out to be the most conspicuous wilful defaulter in the bank-run credit markets. And to add insult to injury Mallya conveniently left the country despite an unpaid debt of over Rs 7,000 crore. Out of this the State Bank of India alone has about Rs 1,600 crore at stake. Though Mallya grabbed the headlines for being a defaulter, he is one among many corporate heavyweights who have defaulted in repaying their loans to banks. 


This has led to a state where banks, mainly public sector banks, have been sucked out so badly as to be left in reds amid what is supposed to be mounting bad loans or Non-Performing Assets. 


Recently 27 public sector banks wrote off Rs 1.14 lakh crore of bad loans through the fiscal years 2012-15. But this was expected as the non- performing assets have been rising over a quite some time. 


In September 2008, the NPA’s stood at Rs 53,917 crore, and by September 2015, this figure rose to Rs 3,41,641 crore. The Gross NPAs of banks, as a percentage of the total loans, has grown from 2.11 percent to 5.08 percent.


What is NPA?


In simple terms, banks give loans which are termed as assets, because the banks generate their income from the interest that accrues on these loans. But when the loan is not repaid even after 90 days of due date, then that it turns into NPA.


The Reserve Bank of India has quite clearly stated that all advances where interest and/or instalment of principal amount remain due for more than 90 days, it would be classified as a non-performing asset. 


History of NPA


While public sector banks are under severe distress now, this wasn’t the case before 2008. At that time it was the private banks that had the highest NPA, with ICICI bank topping the list with 4.18 percent. However, few public sector banks like Uco bank and Central bank also figured in the list.


Somehow this started changing by March 2009, when public sector banks started overtaking the private ones on the NPA front. The State Bank of India (SBI) and Indian Overseas Bank were among the top 10 banks with huge NPAs. As the public sector banks faced competition, by 2011-2013 they started giving loans to corporations without much emphasis on the credit worthiness of the corporate. 


Presently, nine out of 10 public sector banks have the highest NPA. These banks are on verge of crisis as investors are selling their shares in panic.


Banks put onus on Government


The SBI chairperson Arundhati Bhattacharya, however, has said that the blame for NPAs was not limited to them. She said that promoters, Government, lenders and even the regulators are to be blamed for it. 


“Promoters were bidding aggressively riding on the back of good times around 2007-08 and some of them were diverting funds out of the well-run units hoping the money flow would continue forever,” said Bhattacharya. 


She added that banks, extended loans for long duration, hoping the funds would be recovered. Whereas the regulator allowed this to happen without taking any action and Government’s lack of clarity at policy level are the reasons for the NPAs. 


Government in a tight spot


Minister of State for Finance, Jayant Sinha, recently stated that the reasons for increase in NPAs are: slowdown in recovery in global economy and continuing uncertainty in the global markets leading to lower exports of various products like textiles, engineering goods, leather and gems etc, factors like volatility in prices of raw material and the shortage in availability of power to some sectors.


He added that the Government has taken specific measures to address issues in sectors such as power, roads, steel, textiles, where incidence of NPAs is high. He also said that the Government has approved establishing six new DRTs or Debt Recovery Tribunals to speed up the recovery of bad loans of the banking sector, in addition to existing 33.


Union Finance Minister Arun Jaitley in August last year had called the levels of NPAs in public sector banks unacceptable and had announced a Rs 70,000 crore compensation plan for these banks. This was to be disbursed in over four years. In this budget too, Jaitley announced a package and stressed that the banks will have clean balance sheets by 2017.


Even a standing committee formed to look into bad loans and stressed assets in the banking sector has said that the speed at which bad loans seem to be growing was quite high. The report also said that public sector banks were much lenient in giving loans as compared to private banks. 


As the NPAs in the banks rose, their quality of lending also seems to have worsened. The numbers show that more than 5 percent of all lending done by public sector banks was classified as NPAs by 2015 while the ratio was 2.3 percent in 2011.


To cut the mess


Corporates which have stronger credit needs are now moving beyond banks. Instead of taking loans these corporates have now started looking at capital markets to raise funds. 


Owing to global slowdown very few corporates earn enough operating profit to even service their interest and seeing the global trend it is unlikely that the situation will improve anytime soon.


Recently SBI chairperson Arundhati Bhattacharya called for consolidation of the banking sector with the objective of having four to  six large banks. 


NPA and investments 


At the Board meeting of RBI held in March this year, Finance Minister Arun Jaitley said that there is no need to overstate the impact the overall lending activity of banks. 


“We don’t want to create a situation where we overstate the crisis and in this process the whole activity of lending for growth starts suffering because we will become extraordinarily defensive. So it is some category where there has been prima facie misconduct, which has taken place by the individual which have to be looked into,” said Jaitley. 


Agreeing with the Finance Minister, Reserve Bank of India Governor Raghuram Rajan said that indulging in a broad fishing expedition may affect furnishing of loans by banks and in turn hamper the investments.


“We have to be careful as we go forward that we penalise criminal action but that’s not what the regulator but the judiciary that’s where it is to be taken up. But we don’t want to indulge in a broad fishing expedition which then becomes a reason for banks to get worried about making loans which then will hamper the recovery and hamper the investments to be made in infrastructure. So as a country and as a system we have to draw that balance very carefully,” Rajan said.


The Finance Minister also said that cleaning of balance sheets will take place over the next few quarters on account of revival of sectors which have slowed down due to weak economic environment.


The RBI has given a deadline of March 2017 for all banks to clean up their balance sheets, which also require lenders to set aside capital in the form of provisions. Rajan has already stated that banks should deal with the NPA problem upfront, instead of postponing and worsening it.