Events & Issues
New Delhi, 16 June 2016
Stressed Assets
CAN CRISIS BE
AVERTED?
By Dhurjati Mukherjee
The Government has decided to empower and protect State-owned
banks to make commercially prudent settlements in cases of stressed assets.
This was underscored by Finance Minister Jaitley recently after a high level
review meeting of the performance of the banking sector. More so, as the Bankruptcy
and Insolvency Code has been enacted and expected to become operational soon.
Besides, a further set of amendments to the debt recovery
legislation are before a joint committee of Parliament which would further
empower banks to tackle the rising non-performing assets (NPAs).
Shockingly, the cumulative loss of Rs 18,000 suffered by
banks last fiscal have pushed them to a critical situation even though the
losses were mainly on account of higher provisioning for bad loans notwithstanding
the State-owned banks made operating profits of Rs 1.40 lakh crores.
Though the Government has not raised any alarm over this
state of affairs, it is dealing with the situation quite firmly. Whereby, the Government
has earmarked Rs 25,000 crores for the recapitalization of PSU banks and would
provide more if needed.
Undoubtedly, the NPAs of several banks went up beyond
expectations. The most startling figures were of Punjab National Bank which showed
NPAs increasing to 12.90 per cent of its gross advances from 6.55 per cent in
the year-ago period, mainly because the bank recognized dodgy loans in capital
goods, engineering, iron and steel and infrastructure sectors as bad debts.
In absolute terms, gross NPAs jumped to Rs 55, 818 crores
against Rs 25,694 crores in the last fiscal.
Similarly NPAs of UCO Bank increased from 6.76 per cent in
2014-15 to 15.43 per cent in 2015-16 while for Bank of Baroda it went up from
3.72 to 9.99 per cent and Allahabad Bank from 5.46 to 9.76 per cent during the
same period.
Notably, there are many other banks whose NPAs have
increased significantly in the last one year. According to one estimate the
stressed assets in the country appears to be bigger than the size of New Zealand’s
$170 billion economy!
An example: The Adani group, reportedly close to Prime
Minister Modi has a debt of Rs 72,000 crores, an amount equal to the total debt
of farmers in the country, according to a JD(U) Rajya Sabha MP.
This is not all. According to him, corporate houses owed Rs
5 lakh crores to PSU banks of which Rs 1.4 lakh crores was alone owed by five
companies, Lanco, GVK Suzlon Energy, Hindustan Construction Company, Adani
Group and Adani Power.
Recall, the Supreme Court pointed out last month that the
banking system mechanism of granting and recovering big loans appeared flawed
and suggested the need to set up an expert panel to suggest remedial measures.
On its part, the Reserve Bank submitted to the Court a list
of big defaulters, each of whom had failed to repay loans worth Rs 500 crores.
However, it put a caveat by stating that disclosures of defaulters would be
prejudicial to the country’s economy. In
fact, according to available figures, the loan amount has grown to over Rs one
lakh crore!
Meanwhile, eminent advocate Prashant Bhusan made an 11-point
suggestion to the Apex Court
which included transparency in loan advancement and recovery efforts. According
to him, there was no reason why the RBI could not share information with the
public about defaulted loans and the reason for non-payment.
Undeniably, lack of strict monitoring by the RBI and banks
has resulted in such a situation. In fact, some business houses do not take timely
return of loans seriously as they feel there are influential people to save
them from any crisis situation.
Surprisingly, some people continue to harp on the need for
privatization, citing the lack of efficiency of the Government, but the track
record of the sector is not all that encouraging. Indeed, the same people talk
against subsidies for welfare schemes and think that privatization is the
panacea of all evils.
Importantly, the increasing stressed assets of banks have
been the result of business houses not caring to repay public money, resulting
in low profitability and reduced priority sector lending.
Apart from the Rs 25,000 crores allocated in the current
financial year and around Rs 20,000 crores to be provided during 2017-18 and
2018-19, PSU banks need up to Rs 240,000 crores by 2018 to meet Basel-III
capital norms. Obviously for this, the NPAs have to be reduced apart from
hiving off non-core businesses and leveraging bond issuances.
But a recent report of Moody’s Investors Service found that
the State Bank of India
and 10 other public sector banks would need Rs 1.2 lakh crores in capital
through 2020.
Pertinently, at the Banking Summit in March, it was averred that
as of September last, banks had 6.2 per cent of their total loans categorized
as bad loans or non performing assets. Another 7.9 per cent were restructured
loans, meaning they were earlier bad loans.
Consequently, according to Moody’s banks in their run-up to
March 2017 could report losses as much as Rs 74,900 crores. It further found
that increased recognition and provisioning of non-performing loans would
require a corresponding front-ending of capital requirements which suggests
that capital constraints might remain a key credit weakness for public sector
banks.
However, with the enactment of the Bankruptcy Code it would
facilitate banks to go after defaulters without the judiciary delaying the
process inordinately.
But the question is: How long would it take to practically
nail down defaulters? This would be very necessary to put a check on bad loans.
But it remains to be seen whether the banks would be able to bring to book some
of the big defaulters who are aided and protected by influential politicians.
Clearly, the talk of banks privatization as a panacea has no
basis as the private sector is to blame for the present state of affairs. The
RBI Governor Raghurajan has rightly rejected talks of privatization of public
sector banks and emphasized that the urgent need was for banks to clean up
their balance sheets.
In sum, privatization would not meet the objectives of
priority sector lending and the whole system would be geared to serve the
business class, which is obviously not desirable in the country.
It appears the Government is in no mood to foresee a banking
crisis as the newly created Banks Board Bureau, headed by former Comptroller
and Auditor General Vinod Rai is seriously examining the problem.
The question of NPAs needs to be tackled with greater
insight before it gets out of hand. Additionally, bank managers have to be
strict in giving credit and they need to check credentials judiciously without
any bias from any quarter. ----- INFA
(Copyright,
India News and Feature Alliance)
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