Corporate debt and bank NPAs

India’s top conglomerates have been under immense financial stress, despite their attempts to cut debt by selling assets and cutting capital spending, according to a report by Credit Suisse Group, a leading global financial services firm. The total debt at the top 10 most indebted groups has risen seven times over the past eight years and adds up to 12 percent of the loans in the banking system and 27 percent of corporate loans. They account for a major fraction of the banking sectors credit extended.  The banks that have been generous with credit are mainly the state-owned banks. No professionally managed private bank would lend so prolifically and so recklessly. This is the consequence of “social control” of banks, which neither the Modi government nor the previous UPA government has been able to resolve. In fact, certain experts argue that vast sections of the political class from either side of the “ideological” divide continue to feed this debt-fuelled mania. Bad debts have come in like a wrecking ball and hit the normally robust Indian banking system hard. Over the past few years, Indian banks have sought to recast loans that look like they will enter the bad debts column. The way they have done this is reminiscent of the shady tactics used in the 2008 crisis. Indian banks have regularly been taking haircuts: the difference between the market value of an asset used as loan collateral and the amount of the loan. What’s worse they have been extending repayment periods to make their books look better and some may even be cooking their books to keep bad debts off the account books. Loans of companies such as Deccan Chronicle, Kingfisher Airlines, Essar Steel, amounting to a whopping Rs 30,000 crore have gone bad. So while the owners of Deccan Chronicle floated the Deccan Chargers; while Vijay Mallya was shooting the latest edition of his swimsuit calendar; while Essar Steel’s parent companies were busy sponsoring the ‘Think’ fest; it was the Indian banking system which was suffering silently. One must also juxtapose this reality with the fact that India is a country where farmers commit suicide unable to repay their loans while the rich get away with everything.

Earlier this year, a report by CRISIL lays out the sheer magnitude of the problem facing the Indian banking industry. The report estimates that gross Non-Performing Assets (NPAs) will rise by almost 20 percent to Rs 4 lakh crore during the current fiscal year. As a ratio to total assets, they will increase by about 20 basis points to 4.5 percent. The report also estimates that “weak” assets, which include NPAs as well as some proportion of restructured assets, will come in at Rs 5.3 lakh crore during the year, about six percent of total assets. Instead of being sharp, alert and focused on tackling this problem, the combined Indian banking industry is content in slumbering onwards without addressing root causes. 

The best thing the RBI can do right now is to ensure that the financial health of public sector banks (PSBs) does not deteriorate further. The sanction of big loans should be outsourced to a group of professionals who should be directed to follow the appraisal process practiced by leading private sector banks. In fact, the top management in PSBs should not hesitate to approach their private sector peers to learn the best management practices. The RBI’s circular called a Strategic Debt Restructuring Scheme issued to all scheduled commercial banks is a step in the right direction. It suggests several manifold solutions to the looming crisis. In some cases, defaulting borrower companies may not be able to come out of stress due to operational/ managerial inefficiencies despite substantial sacrifices made by the lending banks. In such cases, change of ownership will be a preferred option.  These are some of the steps in the right direction, but lot more needs to be done. Incremental reforms would be a good place to start if big bang reforms do not seem possible.