Government goes soft on its banks

For over two years, the government under both the previous Congress-led UPA and now BJP-controlled NDA had insisted that the Reserve Bank (RBI) should slash prime lending rates and allow greater liquidity with commercial banks irrespective of the domestic inflation rate. Such measures were sought to promote industrial investment and growth. Both the UPA and the NDA governments were so upset with the RBI governor that they wanted to control indirectly the constitutional authority of the central bank and its credit policy direction. They wanted to achieve their ill-advised goal through various measures to please business and industry and pursue the economic growth agenda against inflation that erodes the real value of currency and contracts the common man’s purchasing capacity.

While the UPA was far less successful in making former RBI governor Duvvuri Subbarao, a retired IAS officer, fall in line even after giving him a two-year extension in the job, the current NDA government has more or less had its way. The current RBI Governor Raghuram Rajan, also a UPA recruit, reduced lending rates by four times in one year to an aggregate 125 basis points or 1.25 per cent and released cash into the system. Surprisingly the government did not show similar enthusiasm to ensure that its banks responded to the RBI gestures. Ironically, the industry that has been pressurising the government on RBI rate cuts is almost silent when banks do not follow suit or use their judgment on lending and deposit rates. The Union Ministry of Finance says it does not want to interfere with rate cut decisions of banks. The question one may ask: why is the finance ministry only after the RBI’s judgment on credit policy that does not even fully influence on-ground rates?

The government has an answer that it does not want the state to embarrass itself and the management of public sector banks. The reason is simple.  The government, a controlling shareholder of these banks, is also responsible for their overall operations. The fact is that most of these banks are operating poorly. Sticky loans are running into a few lakh crores. No one knows the exact volume as bank balance sheets rarely disclose the real status of sticky loans or non-performing assets, good portions of which get routinely restructured. Most borrowers, which are critical to high RBI rates, are silent on high bank lending rates. Big borrowers are also often the biggest offenders. 

There are many large companies that borrow little from banks. Instead, they ‘lend’ their surpluses to other corporates using the ‘investment’ portfolio route. The gap between the credit and deposit rates of India’s commercial banks is among the highest, implying the inefficiency of these banks. Most large global banks and institutions find a three or 3.5 per cent credit-deposit rate gap quite comfortable. Banks in India would like to have a cushion of six to seven percent, if not more.

Also, it must be recognised that in most cases of large credit disbursement, the quality of credit or the risk factor often goes by the government’s assessment of projects, their implementation schedules and profit projections. Take, for instance, the UPA regime highway projects under the ‘build-operate-transfer’ (BOT) model. The latest report by the rating agency, CRISIL, says about 7,500 km road projects are currently at high risk of either remaining incomplete or being abandoned due to huge losses. The government-owned National Highway Authority of India had awarded these contracts to private developers between 2009-10 and 2011-12 under the UPA regime on the BOT model. The projects now have an outstanding debt of Rs. 17,100 crore. The under-construction projects now require fund support of at least Rs 28,000 crore over the next two years to cover the cost overrun before completing them. What happens to the bank exposure in these projects?

Similarly, the aspect of political pressure on state-sector bank management cannot be ignored. That explains why some business tycoons manage special favour from government commercial banks under a particular political regime. Some business tycoons are always seen as the cynosure of certain national government. Top public sector bank management can ignore them only at the cost of their job. Many banks have fallen prey to such political pressure. This is an on-going problem. Certain bank managements often take advantage of the situation to serve their private interest. And, it may not be totally out of context, if one links such problems with the poor operational status of some of the state sector banks. Lately, the RBI has initiated ‘corrective’ action at the Indian Overseas Bank (IOB) on grounds that its management is unable to revive it.  The public sector commercial bank posted a net loss of Rs.245 crore during June-September 2014. The bank’s operations are being monitored by RBI every month. Its expansion and recruitment have been curtailed.

If banks are not keen on lowering the lending rates in keeping with the RBI rate cuts, it could be because they are unlikely to generate enough demand for loans for viable projects. The latest RBI data reveals that credit growth had hit a 20-year low in June, last, slipping below nine percent, and has stayed around that level for them. The wedge between the deposit and credit expansion may have shrunk, but not enough to meet the expectations of the commercial banks. With large PSUs such as NTPC and PFC raising long-term tax-free bonds offering returns above 7.30 percent, banks may find it difficult to get large safe borrowers from state sector enterprises. Thus, bank lending rates are unlikely to fall very soon despite the Reserve Bank’s latest gesture.