The banking sector in India is in a crisis, with the burden of bad loans brewing for some time now. As far back as November 2014, the Reserve Bank of India (RBI) Governor castigated[kas-tu,geyt(condemn,फटकारना)] “riskless capitalism” being enjoyed by Indian big businesses — while the profits of the boom period have accrued as lucrative[loo-kru-tiv(profitable,लाभप्रद)] returns on their equity, the losses during the downturn have accumulated as bad debt in the banking system, particularly the public sector banks. Little has happened since then by way of corrective policies.
Two parliamentary committees — the Public Accounts Committee and the Standing Committee on Finance — have meanwhile studied the problem of stressed loans in the banking system and expressed outrage['awt,rey(anger,नाराजगी)], recommending measures such as forensic audit of bad loans. The Finance Ministry is now reportedly working towards the creation of a public-funded asset reconstruction company (ARC), which will buy off the bad debts and cleanse the banks’ balance sheets. But is such a bailout justified?
The “stressed” banking sector
According to RBI statistics, annual growth of bank credit in India, which had crossed 30 per cent in the boom years of 2004-2007, has markedly declined to around 9.7 per cent in 2014-15 and further down to 9.4 per cent in the first half of 2015-16. The decline in credit growth has followed a severe decline in the profitability of scheduled commercial banks, with public sector banks suffering the most in this profit squeeze.
This is not surprising given the fact that public sector banks are saddled[sa-d(u)ld(burdened,लदा होना)] with a disproportionate share of non-performing and bad loans within the banking system. As per RBI’s banking statistics, out of Rs. 75.6 lakh crore gross advances made by all scheduled commercial banks taken together till March 2015, a sum of Rs. 3.22 lakh crore was classified as non-performing assets (NPAs), taking the gross non-performing advances (GNPA) to gross advances ratio to around 4.27. The public sector banks accounted for 74 per cent of the gross advances and 86 per cent of GNPA of the scheduled commercial banks in March 2015.
RBI’s Financial Stability Report (FSR, December 2015) states that out of the total GNPA, the share of “large borrowers” — defined as having aggregate exposure of Rs. 5 crore and above — has increased from 78 per cent in March 2015 to 87 per cent in September 2015. These large borrowers are not farmers or small producers but large or medium-sized corporates.
Moreover, the banks have been simply rolling over a large volume of debt owed by the large borrowers, mainly through corporate debt restructuring, in order to downplay the growing incidence of NPAs and window-dress their balance sheets. ‘Restructured advances’ amounted to over Rs. 5.24 lakh crore at end-March 2015. This, added to Rs. 3.22 lakh crore of NPAs, amounted to Rs. 8.47 lakh crore of ‘stressed advances’ in the banking sector in 2014-15, accounting for 11.2 per cent of the total gross advances of banks and around 6.7 per cent of India’s GDP.
Such huge amounts of stressed assets in the bank balance sheets persist[pu'sist(remain,बने रहना)] despite substantial debt write-offs that have already been made by the banks. As per RBI data, NPAs totalling over Rs. 60,000 crore were written off by the scheduled commercial banks in 2014-15. The beneficiaries of such largesse have remained unknown to the public.
The Finance Ministry had divulged[di'vúlj(disclose,खुलासा)] earlier that the top 30 NPAs of the public sector banks amounted to over Rs. 95,000 crore in December 2014, which accounted for over one-third of GNPAs of the public sector banks. However, the Ministry also cited[sited(mentioned,उल्लेख)] Section 45E of the RBI Act and other banking laws to withhold specific information regarding the defaulters. Only a small list of “wilful defaulters” has been made available, with Vijay Mallya’s Kingfisher Airlines topping the list.
The Finance Ministry has recently revealed in Parliament that the public sector banks have identified 7,265 cases of “wilful defaulters” till September 2015, amounting to Rs. 64,334 crore, accounting for around 20 per cent of the GNPAs of the public sector banks. Out of this, FIRs have been filed only in 1,624 cases (22 per cent) involving Rs. 16,602 crore. It is clear that not only are the laws and institutions related to recovery of debt and corporate bankruptcy in India lax and loophole-ridden, the banks are themselves reluctant[ri'lúk-tunt(unwilling,अनिच्छुक)] to bring even the wilful defaulters to book.
The picture that emerges is one of a toxic nexus of unscrupulous[ún'skroo-pyu-lus(dishonest,बेईमान)] businessmen, negligent and corrupt bankers, complicit auditors and an easy-going regulator ripping off the banking system, especially the public sector banks. What this calls for is a moratorium[mó-ru'to-ree-um(suspension,स्थगन)] on corporate debt restructuring and non-transparent debt write-offs, through which this scam is being perpetuated[pu'pe-choo,eyt(remain,बने रहना)] , and a complete overhaul[ow-vu'ho(repair,सुधारना)] of the laws and regulations governing corporate defaults and debt recovery. The penal provisions of the Insolvency and Bankruptcy Code introduced in Parliament last December need to be further strengthened in that direction. The focus of legislative changes should be on dismantling[dis'man-tu-ling(break,विखंडन)] the edifice[e-du-fis(structure,स्वरुप)] of parasitic, crony capitalism rather than on enhancing the supposed ‘ease’ of doing business.
Credit-Suisse Securities Research and Analytics has been closely tracking the company financials of the 10 most severely debt-stressed corporate groups over the past three years, namely Lanco, Jaypee, GMR, Videocon, GVK, Essar, Adani, Reliance ADAG, JSW and Vedanta. Its latest ‘House of Debt’ report (October 2015) reveals that the combined debt of these 10 groups taken together have increased by seven times in the past eight years to reach Rs. 7.33 lakh crore in 2014-15, accounting for nearly 10 per cent of the banking system’s gross advances. Credit-Suisse’s analysis further shows that large chunks of corporate debt are yet to be recognised as ‘stressed advances’ by the banking system, despite the solvency ratios of those large companies crossing the danger mark.
Misplaced priorities
A key systemic cause behind such intense corporate debt distress and the accumulation of bad loans within the public sector banks is to be found in the premature euthanasia[,yoo-thu'ney-zhu(mercy killing,इच्छा-मृत्यु)] of the Development Financial Institutions (DFIs) in India. Following the recommendations of the Narasimham Committee-II, DFIs like the ICICI and IDBI, which were created in the post-Independence period to provide long-term finance for industry, were converted into universal commercial banks. The committee’s presumptions regarding the capacity and skills of the commercial banks and capital markets in India being sufficient in meeting the financing needs of the industrial sector have turned out to be gross overestimates. NPAs have not only made a comeback, but are threatening the very stability of the banking system.
Industrialisation and infrastructure development in developing economies like ours is crucially dependent upon the availability of long-term development finance with transparent state support. But while DFI loans as a proportion to GDP have increased significantly in countries like Germany, Japan, China and Brazil between 2000 and 2010, it fell in India from 7.4 per cent to 0.8 per cent. Rather than bailing out the delinquent[di'ling-kwunt(due,बकाया)] corporate borrowers and negligent bankers using taxpayers’ money, the government would do well to revive the DFIs, even create new ones through fiscal support, in order to bring transparency in industrial and infrastructure financing and restore the credibility of the banking system.
Courtesy: the hindu
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