Bad debts situation is still too serious to be ignored
Finance Minister Piyush Goyal's exuberance over finally getting a grip on the banks' bad debts might be a little too early. While the latest financial stability report of the Reserve Bank of India showing marginal decline in the non-performing assets (NPA) is a welcome sign, this is yet too little again. After the absolute volume of gross bad debts is so huge, cleaning this Augean stable might take a very long time –maybe, a decade, if we keep persisting at it.
The minister cited data to point a finger that the humongous bad debts of banks is a contribution from the last UPA government. He said: "The period of 2008-14 will be remembered as a period of aggressive credit growth and, as per RBI, the primary reason for spurt in non-performing loans and stressed assets." This may be excused as the political stance of a successor government.
After all, if credit rises, given that some loans would go bad, the volume of bad debts will rise. What is needed is to keep it at the absolute minimum. In the same financial and economic environment, the private sector banks and foreign banks have far lower NPS portfolio than the public sector ones. Take a look, while the public sector banks have NPA proportion of close to 15 per cent, the private ones have around 3.5 per cent and foreign banks even lower. How come?
Can this be ascribed to what the minister has subsequently referred to as "phone banking"? There is no doubting that the loan decisions of public sector banks were most often influenced by unprofessional interferences. Instructions from ministers and even political bosses are not unknown. The government has often used the public secor banks to push their government agenda thorough captive public sector banks. To cite, these banks have been asked to extend loans to sugar mills in UP in the run-up to state elections.
The blame lies in the very assumption of the political class towards the public sector banks. These institutions are thought to be owned by the government and therefore their funds are for the political class to use or, more correctly, misuse. Long back, Janardhana Poojary, deputy finance minister, had discovered that he could order banks to distribute money in plenty at events organised for him. These came to be known as "loan melas" in the days when funding small-time projects under the so-called "Twenty-point Programme" formulated by Indira Gandhi was considered the height of ministerial activism.
There were subsequent squandering of bank funds. Another prime minister, V.P. Singh, had made virtue out of farm loan waiver. He had promised farm loans waiver, drought or no drought; crop failure or bumper crop. It has become such an expectation that when Piyush Goyal announced this government's intention for farmer income support, the irate recipients of the retrospective largess were very vocal critics – why not government grant farm loan waiver.
We have successfully generated a so-called eco-system where public sector bank funds are meant to be drawn but never have to be repaid. Be it large borrowers or small farm loans, why bother to pay back when you reasonably expect that willy-nilly sometime in the future these would be either condoned through "hair-cuts" or waivers.
At least with the Insolvency and Bankruptcy Code in position, and being practised, the large corporate borrowers have been struck with terror. The IBC has put the fear of God or the bank-man in their hearts that if loans are not repaid in time, their companies and assets will be confiscated. Either pay up or get out.
This consciousness about the need to repay bank loans or some little reservations among ministers and politicians that PS banks money is not all theirs have come mainly following the scare raised by former RBI Governor. Raghuram Rajan. Immediately on assuming office, the most glamorous RBI Governor made a quick assessment of the bulging burden of bad debts around the neck of public sector banks. Being a specialist in finance and familiar with the financial world, he had put his finger on the weakest point of India's sprawling banking system.
When over 85 per cent of Indian banking is attributed to the public sector ones, such a glaring weakness among them threatens the entire financial system of the country. Dr Rajan had introduced a series of technical measures to contain this epidemic, some of which were deeply resented by the present-day government as well.
Take for instance the RBI stipulation that banks having a certain baggage of bad debts, compared to their own funds, should not be allowed to expand their credit portfolio. When a large number of banks were placed under this surveillance watch and their credit growth were frozen, funds flows had also become restricted. The government, eager to prove its track record of high growth, felt this was an unnecessary restriction and wanted these to be eased. The last RBI governor, Urjit Patel, who had taken charge from Rajan, had refused to budge and it had become one of the points of contentions between the RBI and the government.
The finance minister had gleefully announced that three PSBs have been taken off the PCA framework and would now be free to extend loans. One only hopes that these banks have genuinely overcome their stringent existence and were again back to normal. Failing that, these banks would again face the same quandary over again.
Technical checks and balances are the absolute necessity for keeping our banks safe and the Indian financial system stable. However, it is not just these preventive watches that are the foundation of a stable and robust financial system.
The granite on which the Indian banking system should rest is trust and respect for these institutions. The owner of public sector banks should think themselves as trustees of the public money and not just think themselves as their owners. Millions of Indians have trusted their small lifetime savings with the public sector banks. The politicians at the head of the government of the day should not misuse that trust.
(The views expressed are strictly personal)