An increasingly stressed financial system continues to haunt Modi – government. The more it endeavours to address the maladies afflicting the scheduled commercial banks [SCBs] [through a host of initiatives such as “Indradhanush” and recapitalization of public sector banks [PSBs]], the more grievous these become. A semi-annual Financial Stability Report [FSR] recently released by RBI governor, Raghram Rajan makes it official.
The gross non-performing assets [NPAs] [bad loans which do not yield any return] of all SCBs increased from 4.6% of gross advances as in March, 2015 to 5.1% in September, 2015 and are projected to increase to 5.4% by September, 2016. The restructured standard advances as percentage of gross advances [these are potentially bad loans but salvaged by relaxing terms of repayment] decreased from 6.4% in March, 2015 to 6.2% as September, 2015. By September, 2016, these are projected to be 8.2%.
All put together, the stressed assets [NPAs plus restructured loans] increased from 11.0% in March, 2015 to 11.3% in September, 2015 and will increase to 13.6% by September, 2016. However, the overall scenario masks substantial deterioration in asset quality of PSBs. Thus, stressed assets for PSBs as on September, 2015 were 14.1% whereas for private sector banks, these were 4.6% and for foreign banks still lower at 3.4%.
A dis-aggregated picture – bank-wise, sector-wise and sub-sector-wise – throws up a more skewed pattern. As of September, 2015, 34 banks with 12% share in advances showed very low stressed advances ratio of less than 2%, whereas 16 banks with 27% share in advances had high stressed advance ratio of over 16%. The imbalances become even sharper when one looks at the sector/sub-sector break-up.
As of June, 2015, industry continued to record the highest stressed advances ratio of 19.5%, followed by services at 7%. Five sub-sectors – mining, iron & steel, textiles, infrastructure and aviation – which together constituted 24.2% of total advances as of June 2015 – contributed 53% of total stressed advances. Stressed loans in infrastructure were 24% whereas, in aviation sector these were a whopping at 61%.
The increasing stressed assets are a manifestation of a deeper malaise afflicting corporate sector and their inability to service debt which is primarily due to their weak balance sheets. Thus, out of the total of 2711 companies, around 16% had an Interest coverage ratio [ICR] [ratio of earnings before interest, tax, depreciation and amortization [EBITDA] to interest payments due] of less than 1. ICR is a benchmark of company’s ability to service its debt. It declined in case of public limited companies. Among the private limited companies, ICR of medium size companies increased though it declined marginally in case of small companies.
ICR of less than 1 for more than 400 companies points towards a very pathetic situation whereby their earnings are inadequate to even pay for interest forget discharging other obligations. One may be tempted to attribute all of this to economic slowdown and delays in granting environment, land and other statutory clearances [leading to delay in execution of projects] especially during 2011-12 to 2013-14. But, that would be a myopic view. Had it been so, this would have affected all banks and sectors across the board.
Let us look at it from another angle. If, these factors alone were sole bottlenecks, the situation would have improved consequent to resurgence in growth [well above 7% annualized] during 2014-15 and first 8 months of current fiscal year as also expeditious clearance of stuck projects under Modi – dispensation. It may well be argued that projects cleared now will take some time to be operational and get in to a position whereby they start generating adequate cash flows. Yet, it can only partially explain the underlying vulnerabilities.
More than anything else, a major factor behind deteriorating asset quality was disproportionate increase in lending by PSBs – in many cases without conducting due diligence on promoters/borrowers [instances of balance sheets certified by ‘fictitious’ chartered accounts have come to light]. Lending to infrastructure projects which was just about 8% in 2011-12 leapfrogged to 21% during 2012-13 and further to around 31% during 2013-14. The money went mostly to large corporate houses implementing mega-size projects in power, roads, highways, airports, seaport etc.
Under corporate debt restructuring (CDR) running in to tens of thousands of crores, PSBs were forced to give major concession at the cost of bleeding their balance sheets. It is therefore, no surprise that stressed assets of PSBs are over 3 times that of private sector banks and over 4 times those of foreign banks [latter needless to say, were extremely circumspect and sanctioned loans only after conducting due diligence] and infrastructure ranks top among sectors where PSBs face maximum stress.
Yet another factor was brazen use of PSBs by UPA-dispensation in the past to achieve its political objective such as waiving farm loans [banks are still feeling pricks of 2009 Rs 50,000 crores farm loan waiver] and salvaging state electricity boards [SEBs] who are made to supply power at throw away tariffs or even free in some states; the financial restructuring package [FRP] of 2012 cost the PSBs dearly.
So, how do we fix the problem? Modi – government is well on track in restoring financial health of all those companies hit by deceleration of economy, stuck projects and policy paralysis. It has taken proactive steps to effectively address issues in all these areas and also implemented measures to remove sector specific bottlenecks such as in steel, power, mining and infrastructure.
The government is also acting with alacrity to root out corruption in PSBs and ensure that all loans in future are sanctioned after due diligence and based on an assessment of project viability. They need to do continuous monitoring and follow-up and have surveillance systems in place to alert management on impending slippages if any for timely corrective action.
While, this will prevent emergence of fresh NPAs, Modi needs to galvanize government’s machinery and bank managements to deal with backlog of NPAs especially the recalcitrant corporate borrowers who had no credible projects at hand and diverted funds for other uses. While, the government has mooted Bankruptcy Code, opposition parties should help in ensuring speedy passage of the bill [in the just concluded winter session, it was referred to a joint committee of the Parliament].
The government must also refrain from using PSBs for serving its political constituency camouflaged as ‘social welfare’ say, by way of giving interest subsidy or loan waiver or insisting on compulsory sanction of loans to certain sections in total disregard of viability considerations. So far, its record on this front is much better than UPA, however it needs to do a lot more.
In the interregnum, it should stick to its recapitalization road-map for PSBs [infusion of Rs 25,000 crore each during 2015-16 & 2016-17 followed by Rs 10,000 crores each during 2017-18 & 2018-19] to ensure that they remain adequately capitalized to meet the requirements of growing economy.