The banks – mostly public sector banks [PSBs] – are relentlessly fighting a battle to deal with unsustainable levels of non-performing assets [NPAs] those were caused by ‘indiscriminate’ lending [with hardly any or no ‘due diligence’ which is a fundamental requirement for funding any project] mostly to corporate sector particularly during a decade under erstwhile UPA – dispensation [2004-2014].
While, NPAs have declined significantly from the peak level reached as on March 31, 2018 [courtesy, a massive dose of recapitalization by the union government of over Rs 300,000 crore during the last 5 years as also rigorous governance norms including putting some of them under prompt corrective action framework], the stress is far from over. This is in view of recent developments [e.g. order of Supreme Court (SC) directing telecom services providers to pay over Rs 130,000 crore as past dues towards license fee and spectrum usage charges (SUC)] which could result in substantial addition to NPAs.
Meanwhile, since last year, the shadow banking sector or non-bank finance companies [NBFC] have gone through unprecedented financial crisis with two big companies viz. Infrastructure Leasing and Financial Services [IL&FS] and Dewan Housing Finance Limited [DHFL] going into liquidation. Even as these two behemoths have outstanding debt of Rs 90,000 crore and Rs 83,000 crore respectively, they owe a significant portion of this to the banks – mostly PSBs. This is adding to latter’s NPAs.
As if this was not enough, another headache is in the making for the banks. This concerns the loans given to micro enterprises and small and medium-sized enterprises. According to data from credit bureau Cibil, the NPAs for micro enterprises and small and medium-sized enterprises [SMEs] as percentage of total loans were at 8.7% and 10.6%, respectively as of June 2019. In particular, the loans given under the Pradhan Mantri Mudra Yojana [MUDRA] – launched in April 2015 – are giving pain.
Under MUDRA, banks provide loans up to Rs 10 lakh to non-corporate, non-farm, small/micro enterprises [SMEs] under three categories depending on size viz. Shishu: loans up to Rs 50,000/- ; Kishore: Rs 50,000-5 lakh and Tarun: Rs 5-10 lakh. According to MUDRA’s annual report, NPAs under the scheme was 5.38% as on 31 March 2018. As per India Ratings, the position is likely to deteriorate further during 2020-21 after the existing forbearance on restructuring of loans to small businesses allowed by Reserve Bank of India [RBI] expires.
Traditionally, small borrowers are prone to least default. This is led primarily by two underlying forces. First, for availing of a loan, a small borrower mortgages his asset [land or house] and an underlying compulsion to protect it prompts him to make timely repayments till such time the loan liability is fully extinguished. Second, an instinct of not being labeled as someone remaining indebted – as a matter of social prestige – drives him to pay off the loan.
Yet, if there are instances of delinquencies in such loans [and on a rising trajectory], this requires careful scrutiny. First, this may have to do with the banks dispensing with the requirement of collateral while giving loans particularly under MUDRA scheme [Modi has bandied this as a main selling plank to buttress his inclusive development agenda]. But, this by itself can’t explain the increase in NPAs; more so because of the inherent trait [second underlying force] as also the fact that nearly 70% of MUDRA loans were given to women who show a greater sense of responsibility in servicing the loan.
One can decipher two trends. First, banks could be overzealous while disbursing loans merely to show that they have achieved the target [loans for total value of Rs 5.57 lakh crore were given under 12.27 crore accounts]. So, it is possible that in several cases, loans were given without conducting due diligence. An observation by deputy governor, RBI, M.K. Jain [at Sidbi National Microfinance Congress 2019] that “banks need to focus on repayment capacity of borrowers at the appraisal stage and monitor the loans through their lifecycle much more closely” goes on to reinforce such a possibility.
Second, this may have lot to do with slow down in the economy. Beginning first quarter of 2018-19, GDP started decelerating which has now plummeted to 5% during the first quarter of current fiscal and 4.5% during the second quarter. While, this primarily reflects declining revenue of medium and large enterprises, small and micro enterprises have suffered collateral damage as the former delay payments to the latter. The reluctance of banks to lend to medium and large corporate for financing their working capital requirements has compounded the woes of SMEs who also face heat due to slackening growth in rural income [courtesy, depressed agriculture].
Whatever may be the underlying reason for the loans given to SMEs becoming NPAs [economic slowdown or otherwise], the fact remains that this is exacerbating the erosion in capital of PSBs already battered by corporate and NBFC loans going in default. Equally worrisome is the inclination of Modi – government to bail the former out in as much the same way as it has done for the latter. Apart from the forbearance on restructuring of loans already allowed by RBI till end of current fiscal, the ruling dispensation is now keen to write-off their loans up to specified limit – may be on lines similar to farm loan waivers which is a new normal for almost all political parties.
These bail-outs may be in the nature of ‘one-time’ relief in the expectation that once helped out of the crisis situation, they will be able to sustain on their own and won’t require any crutches in the future. Besides, they will collectively help in keeping up the momentum of growth. In theory, this looks fine. But, in reality things won’t pan out as intended. This will breed a dangerous cult whereby all types of borrowers – big, small and micro – will look for relief perpetually and do little to stand up on their own.
The borrowers might as well include dubious characters who simply siphon-off funds and get their wrongs condoned under the extraordinary benevolence showered by the present administration. Modi must come out of this mindset of helping out all and sundry as he won’t be able to use the stick against them due to the spontaneous reprimand by the so called ‘free press’ and media which loses no time in blasting him for unleashing agencies [read: CBI, Enforcement Directorate (ED)] after the citizens. Besides, it is a nightmare to get back money from the offenders; courtesy, cumbersome judicial processes which take years to get completed [loot of PMC bank is a case in point].
The government should shun the practice of giving relief to specific constituencies viz. SMEs, NBFCs, PSBs, MUDRA loanees, farmers etc or particular industries such as power, telecom etc. It should restrict itself only to making policy interventions say by reducing and rationalizing taxes and duties or adjusting customs tariff or making basic inputs such as fuel, electricity etc cheaper. This way alone, various stakeholders will try to stand up on their own [even if some of them fall on the way side, ‘social security’ mechanisms can be triggered to offer relief] laying the foundation for a ‘robust’ and ‘healthy’ economy moving on a high growth trajectory.
In sharp contrast, the business as usual [read: current] scenario is the surest invitation to financial disaster with an unending stream of bail-out seekers from the government with no guarantee that they would at all be able to stand up on their own.
Modi should leverage his stature and popularity to bring about the intended paradigm shift in governance style.