Treading the path of sanity
No more Dilly-dallying on NPAs in Banking sector.
Finance Minister Arun Jaitley during his Washington sojourn to attend the Fund-Bank annual jamboree maintained in his interactive session with business leaders that addressing the problem of non-performing assets (NPAs) or what is in plain parlance the unrecoverable debts the public sector banks (PSBs) had been saddled with for far too long remains "a very high priority". Jaitley said this has two aspects. One is to recover what is recoverable. For this the government has created new laws, amended existing laws and have created a new machinery, which will probably take care of it, he said, obviously alluding to the Insolvency and Bankruptcy Code (IBC) with its far-reaching beneficial implications to the stakeholders.
Jaitley also said there was a need to strengthen the public-sector banks so that their ability to lend is maintained. This issue is a high priority area for the government, he noted.
It is germane to note that Montek Singh Ahluwalia, former Deputy Chairman of the erstwhile Planning Commission, remarked recently that the IBC process alters the incentive structure facing bank managements by according them a legally sanctified route to determine what a reasonable haircut is. He said since the alternative is liquidation, they should be willing to accept any haircut that gives them more than they would get from liquidation. He is also sanguine enough to presume that the process would free bank managements from having to bother about the CBI/CVC/ the Comptroller and Auditor General post-mortem which otherwise deters decision-making.
Rightly Ahluwalia is worried that the acceptance of large losses and a commensurate depletion of capital of banks need to be reckoned, even as the process would certainly go a long way in cleaning up the banks' red-lined balance sheets. As he cites market expectations of haircuts of 60 per cent or more might be de rigueur to attract new investors, this would entail considerable erosion of capital. That is the reason why there is an urgent need for beefing up the capital adequacy of the PSBs to a reasonable level.
While this has been the thinking and doing of the government ever since former RBI Governor Raghuram Rajan flagged off the asset quality review (AQR) of the country's banking system in 2015, the concerns of ever-escalating NPAs, inclusive of stressed assets in the banking system, have not been lessened by any mitigating action on the ground so that the confidence in the financial system of the country and its stability are not left to wild conjecture of panicky people that constitute the larger universe of the banks' clientele. It is no secret that the PSBs, albeit being flush with deposits, partly owing to demonetization or what is dubbed by the former Chief Economic Advisor Dr.Shankar N Acharya in one of his widely read column in a pink daily as the Demon with no unintended pun, are pernickety in extending credit to the productive segments of the economy. Their shyness or risk-aversion is understandable, having been bitten twice by loan waivers to farmers and directional lending to crony capitalists under duress from the political dispensation of the past. The resulting panic attack plaguing the PSBs from discharging their Dharmic duty is mostly owing to the overwhelming burden of bad loans that had got many a bank bruised and burnt its arms appallingly. The irony is that even as the corporate tycoons are let off despite the immeasurable damage that they caused to the banking system because of the extant light touch regulations, the political masters still do not refrain from announcing another round of farm loan waivers under the benign illusion that nothing damaging could happen to the system when the freebie culture is socialised!
Even as the ratio of NPAs has been sedulously surging for five years, the options are getting limited. Either you must perforce write off the loans and book losses or urge shareholders to chip in more equity capital. For the latter option, with government as a majority shareholder, its capacity to bring in additional capital to bolster the capital base in the form of recapitalisation is nowhere near the required sums, leaving the beleaguered banking industry to remain unfocused on beefing up its profitability through evenly spread credit disbursal to the various real sectors of the economy to ensure higher economic growth the country is badly in need to re-start its growth engine. It is an open secret that corporate debt piling up hugely is a massive drag on the economy and unless the balance sheets of companies get cleaned up, their ability to borrow and re-invest to keep their machinery moving would turn out to be a Sisyphean task.
There is no point in deprecating against the woeful lack of private investment to ramp up the overall growth of the economy in the face of little action to clean up the corporate mess through purposive action by the authorities concerned. The Department of Company Affairs no doubt needs to be lauded for exposing the egregious shell companies across the country but it should also take concrete steps to ensure that existing blue-chip companies or companies with realistic expansion plans do not get let down for want of meaningful policy support including credit at affordable cost through formal banking channels.
Be that as it may, the predicament of PSBs at this juncture is unenviable as recounted by a recent analytical news story by a western news agency, which documented that Indian banks' bad loans hit a peak of 9.5 trillion rupees or $145.56 billion dollars at the end of June, citing RBI data obtained through right-to-information request. This revealed that the banks' total stressed loans—including non-performing and restructured or rolled over loans—rose to 4.5 per cent in the six months to end-June, 2017. Even as the bulk of the bad loans remains with the PSBs and flow from lending to large conglomerates in steel and infrastructure sectors, the spurt in bad loans among small firms and even retail borrowing is deleterious enough to preclude the banks from encouraging new loans to help fuel growth. In the eventual analysis even as the government had done recognition of the big problem and is moving towards a resolution, the other options of recapitalisation and reform of the banking industry brook no delay for which sensible proposals like specious dilution of the government stake in the existing systems and merger and consolidations on a realistic scale need to be initiated before long.
The road ahead is not easy or paved with a bed of roses but nevertheless, the time has come to traverse on the path to sanity in the larger interests of the economy.
(Views expressed are personal.)