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Distraction from the real problem

Distraction from the real problem
News of former liquor baron Vijay Mallya's arrest on Tuesday in London saw television channels scampering for "expert analysis". Some even went to the extent of congratulating the Indian government on the arrest, while others began speculating on the fate that awaited Mallya. Reports later in the day that he was granted bail threw cold water at all the excitement generated. The former Rajya Sabha MP owes 17 banks in India an estimated Rs 9000 crore, besides standing accused of money laundering and fraud under Indian law. Much to the embarrassment of Indian authorities, he had fled the country on March 2, 2016—the day public sector banks moved the Debt Recovery Tribunal against him. A consortium of banks, led by the State Bank of India, had hoped to restrain the former liquor baron from leaving the country and sought a security deposit from him to ensure his attendance at the debt recovery tribunal proceedings against him. Suffice it to say, they were unsuccessful in their attempts.

Even since his escape, New Delhi has been attempting to get British authorities to extradite him to India. Although both countries have signed an extradition treaty, the process of bringing Mallya back is going to be long drawn. All the hoopla surrounding him deflects from the real problem at hand, which is the mountain of corporate debt that Indian banks, especially those in the public sector, are trapped under. As per recent reports in a leading news daily, the gross non-performing assets (NPAs) of state-owned banks surged 56.4% to Rs 614,872 crore during the 12-month period that ended last December. What's even more frightening is that the volume of NPAs is set to grow further in the following two quarters. Stressed assets now make up over 12% of the total loans in the banking system. The situation in public sector banks is far worse. Their stressed loans are at least 16%, which is more than three times than that of private banks. Real credit growth is now negative, the lowest in over two decades. Nearly 20% of India's corporate debt is held by firms that are not generating enough profits even to service their annual interest – forget about the principal sum they owe. Under the tenure of former RBI Governor Raghuram Rajan, a whole host of steps was initiated to tackle the problem.

Reports later in the day that he was granted bail threw cold water at all the excitement generated. The former Rajya Sabha MP owes 17 banks in India an estimated Rs 9000 crore, besides standing accused of money laundering and fraud under Indian law. Much to the embarrassment of Indian authorities, he had fled the country on March 2, 2016—the day public sector banks moved the Debt Recovery Tribunal against him. A consortium of banks, led by the State Bank of India, had hoped to restrain the former liquor baron from leaving the country and sought a security deposit from him to ensure his attendance at the debt recovery tribunal proceedings against him. Suffice it to say, they were unsuccessful in their attempts. Even since his escape, New Delhi has been attempting to get British authorities to extradite him to India. Although both countries have signed an extradition treaty, the process of bringing Mallya back is going to be long drawn. All the hoopla surrounding him deflects from the real problem at hand, which is the mountain of corporate debt that Indian banks, especially those in the public sector, are trapped under. As per recent reports in a leading news daily, the gross non-performing assets (NPAs) of state-owned banks surged 56.4% to Rs 614,872 crore during the 12-month period that ended last December. What's even more frightening is that the volume of NPAs is set to grow further in the following two quarters. Stressed assets now make up over 12% of the total loans in the banking system. The situation in public sector banks is far worse. Their stressed loans are at least 16%, which is more than three times than that of private banks. Real credit growth is now negative, the lowest in over two decades. Nearly 20% of India's corporate debt is held by firms that are not generating enough profits even to service their annual interest – forget about the principal sum they owe. Under the tenure of former RBI Governor Raghuram Rajan, a whole host of steps was initiated to tackle the problem.

Even since his escape, New Delhi has been attempting to get British authorities to extradite him to India. Although both countries have signed an extradition treaty, the process of bringing Mallya back is going to be long drawn. All the hoopla surrounding him deflects from the real problem at hand, which is the mountain of corporate debt that Indian banks, especially those in the public sector, are trapped under. As per recent reports in a leading news daily, the gross non-performing assets (NPAs) of state-owned banks surged 56.4% to Rs 614,872 crore during the 12-month period that ended last December. What's even more frightening is that the volume of NPAs is set to grow further in the following two quarters. Stressed assets now make up over 12% of the total loans in the banking system. The situation in public sector banks is far worse. Their stressed loans are at least 16%, which is more than three times than that of private banks. Real credit growth is now negative, the lowest in over two decades. Nearly 20% of India's corporate debt is held by firms that are not generating enough profits even to service their annual interest – forget about the principal sum they owe. Under the tenure of former RBI Governor Raghuram Rajan, a whole host of steps was initiated to tackle the problem.


What's even more frightening is that the volume of NPAs is set to grow further in the following two quarters. Stressed assets now make up over 12% of the total loans in the banking system. The situation in public sector banks is far worse. Their stressed loans are at least 16%, which is more than three times than that of private banks. Real credit growth is now negative, the lowest in over two decades. Nearly 20% of India's corporate debt is held by firms that are not generating enough profits even to service their annual interest – forget about the principal sum they owe. Under the tenure of former RBI Governor Raghuram Rajan, a whole host of steps was initiated to tackle the problem.
One of the major tasks that Rajan has undertaken during his tenure is the proposed clean-up of bank balance sheets initiated under the RBI's Asset Quality Review, much to the chagrin of wasteful major corporate borrowers. The RBI's asset quality review covered 36 banks (including all those in the public sector). What the AQR revealed to some extent was the actual scale of the NPA problem. Besides the steps initiated during Rajan's tenure, the RBI and the Centre have not covered any significant ground in tackling the problem. Senior economic advisors to the Centre proposed a 'bad bank'—a private or state-owned public asset reconstruction agency that would buy up bad debt from banks. In its bid to tackle the problem, the RBI has come up with this idea probably with the understanding that many of its schemes—Flexible Refinancing of Infrastructure, Asset Quality Review and Sustainable Structuring of Stressed Assets, among others—have not produced the necessary results. Many have posed the argument that under the current schemes introduced by the Central bank too much discretion is left at the hands of banks. Rajan, however, was never a major votary of the idea. He argued that this approach would just transfer the bad loans from banks to another firm. The focus, he argued, should be on how to restructure bad loans. With a significant amount of NPAs, banks are forced to push up the risk premium, which in other words amounts to raising the cost of lending.

"That's exactly why there is such a huge gap in the commercial lending rate and the policy rate of the RBI. This, in short, is the price of crony capitalism. It is not just banks that are impacted. The resulting high-interest rate regime precludes investments, erodes the competitive ability of Indian business and leaves a big hole in our wallets through payouts on EMIs," according to a leading Indian business daily.

There are wrongdoers among the Indian business community who have raised the cost of borrowing for the common man. NPAs in our public sector banks represent a massive transfer of wealth from the Indian taxpayer to India's business empires. Given the strong bond that exists between major corporate houses and political parties, there is little action against loan defaulters. Politicians and government officials are involved in the decision-making process to grant loans to businesses. Mallya is merely the tip of the iceberg.

The likes of Reliance, Vedanta, Essar, Adani, and Jaypee owe the banks even more money. For the moment, banks have missed the Central bank's deadline to clean up their balance sheets by March 2017, since their efforts were redirected from recovering bad loans to implementing the government's demonetisation initiative. The Centre's latest Budget provided Rs 10,000 crore for recapitalisation of public sector banks in 2017-18. Experts contend that this is markedly below the Rs 25,000 crore the government had set aside in the previous year. Banks are in desperate need for recapitalisation so that they can start lending to sound companies with smart business proposals, thereby kickstarting economic activity.

The onus of repairing weak lenders with necessary capital lies with the government. "At its current level, India's NPA ratio is higher than any other major emerging market (with the exception of Russia), higher even than the peak levels seen in Korea during the East Asian crisis," the 2016-17 Economic Survey grimly notes. The knock-on effect of these bad debts has been deleterious for the entire economy. Don't get distracted by all the hoopla surrounding Mallya.
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