NPAs – is the axe falling on common man?

Under the erstwhile UPA – dispensation particularly during its second consecutive tenure 2009-2014 [this is the time when ‘crony capitalism’ had reached its nadir], public sector banks [PSBs] recklessly gave loans to corporate houses/businesses without assessing the viability of the projects and conducting due diligence. Ten of thousands of crores were pumped into power, steel, telecommunications, textiles and infrastructure.

The ability of the concerned projects/businesses to generate required cash to service the loans was in doubt from the day one. There was an element of ‘inevitability’ in such loans becoming non-performing assets [NPAs] [if an installment is not paid within 90 days from due date, the account is treated as NPA]. Indeed, these did become NPAs but were not recognized in the balance sheet. It was like a person becoming sick but the doctor refuses to declare him so.

Under Modi – government, the Reserve Bank India [RBI] ordered an asset quality review [AQR] of all banks in 2015 to identify stressed assets and make necessary provision in the balance sheet. The ‘cleansing’ process was to be completed by March 2017.

As a consequence, Indian banking system is now saddled with NPAs of about Rs 800,000 crores of which PSBs alone account for about Rs 600,000 crores. The stressed assets [these include ‘restructured’ loans – a glamorized nomenclature for NPAs made to look like standard asset by relaxing the re-payment terms] are much higher at over Rs 1000,000 crores. But, mere recognition is not enough.

The exercise will bear fruit if only it is carried to its logical conclusion by making efforts to recover maximum possible amount following the due process of law. Modi – government has responded well by enacting the Insolvency and Bankruptcy Code [IBC] and amendment in the Banking Regulation Act [BRA].

While, IBC gives powers to banks initiate bankruptcy proceedings against defaulters, amendment in BRA empowers the RBI to give necessary instructions to the banks in this regard. Already, 12 cases accounting for about Rs 200,000 crores worth NPAs have been referred to the National Company Law Tribunal [NCLT] and more accounts are on the way for initiating action.

The good thing about proceedings under IBC is that it has to be completed within 6 months. But, the more important question is what will be the outcome? Considering the track record of the borrowers, it is unlikely that the banks will get back a good sum say 90-95% of loan amount via settlement. In majority of the cases, the Tribunal is expected to order liquidation of the company in which case, there is no certainty as to how much will be realized and when?

Meanwhile, the banks face huge erosion in their capital base due to  provisioning on a monumental scale [in the cited 12 cases, on mere reference to NCLT, 50% has to be provided for and after liquidation is ordered, this would be 100%]. They need to be re-capitalized on top priority or else lending which during 2016-17 was already at its lowest in six decades, will take a steep dip.

According to Fitch Ratings, PSBs are likely to require around 90% of the $65 billion additional capital needed by banks in India to meet Basel III capital standards which will be fully implemented by the financial year ending March 2019. This works out to Rs 380,000 crores and is necessary to raise loan growth, address weak provision cover and aid in effective NPAs resolution.

Against this, the government is working on an estimated capital requirement of only Rs 180,000 crore. Of this, under project ‘Indradhanush’, it has provided Rs 70,000 crore over a 4 year period [Rs 25,000 crores each during 2015-16/ 2016-17 and Rs 10,000 crores each during 2017-18/2018-19] as budgetary support. The banks are expected to raise the balance Rs 110,000 crores from the market. But, even this appears to be difficult.

Funding it from additional budgetary support will result in significant slippage from the fiscal deficit target of 3.2% of GDP for current year and 3% for 2018-19. Just in case, the government has to provide for a further Rs 200,000 crores [gap between the requirement Rs 380,000 crores as per Fitch Ratings and Rs 180,000 crores estimated by government], the impact on fiscal road-map will be disastrous.

Caught in a ‘Catch-22’ situation, Team Modi is now contemplating sale of so called ‘capitalization bonds’. The bonds will be issued by union government and most likely subscribed to by state-run financial institutions such as Life Insurance Corporation of India [LIC].

The interest on these bonds would be adjusted against future dividend payments by banks.This is win-win for both PSBs and union government. While, former get the money they need for re-capitalization, the latter is able to supply it without causing any slippage in fiscal deficit target. But, this is disingenuous.

Whether, it is money coming from the budget [Rs 70,000 crores] or financial institutions like LIC [Rs 110,000 crores plus], the government is using resources of common man collected as taxes or premium from millions of policy holders of LIC to bail out the PSBs. In a sense, it tantamount to bail out of industrial houses who took loans [using their contacts with politicians and bureaucrats] but never bothered to return turning these into NPAs.

Modi should avoid this course. Instead, the government needs to go hammer and tongs after the defaulters and get back the money in a fast track mode. If, today their assets are falling short of loan amount, they must have diverted funds from the project to their personal accounts – using shell companies. The agencies must chase them and make up for the shortfall to maximum extent possible.

This is an absolute must or else, in the eyes of public, present government will look no different than UPA regime. An impression will go that even as the latter allowed honchos to loot the banks, the former didn’t do much to bring it back and eventually, the common man ended up paying for it.


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