Tackling NPAs
19 March 2015 10:42 PM GMT
Since the global financial meltdown in 2008, the dominant paradigm that our political classes have held is that it was India’s conservative approach to the financial sector which protected it from the full-blown impact of the crisis. So ingrained is the suspicion against private bankers that state-owned banks remain firmly closed to the option of privatisation. It does not help that deeply entrenched labour unions threaten to go on a strike every time the possibility of privatisation is mentioned.
This suspicion of the private banking system has some basis in reality. For one the 2008 crisis exposed the seedy cut throat practises of Wall Street which triggered a global meltdown: bureaucratic red tape, abrupt deregulation, obsolete regulation, lax enforcement of financial laws, government pressure to drastically lower lending standards, predatory lending, mark-to-market accounting, greedy hedge funds, unethical private-equity firms, modern finance theory, risk models; everything wrong with the private banking system was present in the 2008 crisis in one form or the other. Be that as it may the public banking system in India is not exactly in awesome shape. “As per data made available by the Reserve Bank of India (RBI), the top 30 non-performing assets(NPAs) of public sector banks amount to Rs 95,122 crore,” according to a reply submitted by Minister of State for Finance Jayant Sinha in Rajya Sabha.
The Indian public banking system has been notoriously lax on recovering bad debts. Moreover they have been prey to a rookie mistake in the business of lending, which is the sunk cost fallacy. In economics, a sunk cost is any past cost that has already been paid and cannot be recovered. For example, a business may have invested one crore rupees into new hardware. This money is now gone and cannot be recovered, so it shouldn’t figure into the business’s decision making process. A prime example of this strategically poor decision making is Kingfisher.
The State Bank of India (SBI) continued to lend money to the troubled airline for nearly half a decade, despite the fact that it never registered a profit. Instead of cutting their losses, the SBI-led consortium converted a sixth of their debt to equity by paying a ridiculous 61 per cent premium over the prevailing share price. In a scathing indictment of the Indian banking sector’s unwillingness to recover bad loans; Reserve Bank of India governor Raghuram Rajan, while speaking at a seminar in Anand, Gujarat said, “We need a change in mindset, where the wilful or non-cooperative defaulter is not lionized as a captain of industry, but justly chastised as a freeloader on the hardworking people of this country”. Not only do public banks need to streamline their lethargic bureaucracies which stifle financial innovation of any kind; they also need to take stock of their situation before we end up like another Greece or Spain in the aftermath of a failed banking system.
This suspicion of the private banking system has some basis in reality. For one the 2008 crisis exposed the seedy cut throat practises of Wall Street which triggered a global meltdown: bureaucratic red tape, abrupt deregulation, obsolete regulation, lax enforcement of financial laws, government pressure to drastically lower lending standards, predatory lending, mark-to-market accounting, greedy hedge funds, unethical private-equity firms, modern finance theory, risk models; everything wrong with the private banking system was present in the 2008 crisis in one form or the other. Be that as it may the public banking system in India is not exactly in awesome shape. “As per data made available by the Reserve Bank of India (RBI), the top 30 non-performing assets(NPAs) of public sector banks amount to Rs 95,122 crore,” according to a reply submitted by Minister of State for Finance Jayant Sinha in Rajya Sabha.
The Indian public banking system has been notoriously lax on recovering bad debts. Moreover they have been prey to a rookie mistake in the business of lending, which is the sunk cost fallacy. In economics, a sunk cost is any past cost that has already been paid and cannot be recovered. For example, a business may have invested one crore rupees into new hardware. This money is now gone and cannot be recovered, so it shouldn’t figure into the business’s decision making process. A prime example of this strategically poor decision making is Kingfisher.
The State Bank of India (SBI) continued to lend money to the troubled airline for nearly half a decade, despite the fact that it never registered a profit. Instead of cutting their losses, the SBI-led consortium converted a sixth of their debt to equity by paying a ridiculous 61 per cent premium over the prevailing share price. In a scathing indictment of the Indian banking sector’s unwillingness to recover bad loans; Reserve Bank of India governor Raghuram Rajan, while speaking at a seminar in Anand, Gujarat said, “We need a change in mindset, where the wilful or non-cooperative defaulter is not lionized as a captain of industry, but justly chastised as a freeloader on the hardworking people of this country”. Not only do public banks need to streamline their lethargic bureaucracies which stifle financial innovation of any kind; they also need to take stock of their situation before we end up like another Greece or Spain in the aftermath of a failed banking system.
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